Volatility persistence in metal returns: A FIGARCH approach
AbstractThis study examines the returns and the long-memory properties of the return volatilities of four metals – copper, gold, platinum, and silver. Daily returns for the January 4, 1999 to March 10, 2009 period are used. Three key issues are addressed: (1) whether the volatility processes exhibit long-run temporal dependence; (2) whether the returns and conditional volatility of returns are affected by the uncertainty brought about by the financial crisis in September 2008; and (3) whether the implied volatility in the equity market, as measured by VIX, plays a significant role in determining metal risk and return. The results show that VIX is important in the determination of metal returns and return volatility. The findings suggest that metal and equity returns are influenced by a common risk factor and failure to explicitly model this factor will yield less than optimal portfolio diversification. Events during the post-September 1, 2008 period contributed to increased return volatility for several of the metals. The interaction effect of VIX and a financial crisis dummy variable is also found to be significant. The results strongly suggest that VIX should be considered in any future modeling of metal returns and return volatility. FIGARCH (1,d,1) appropriately describes the volatility processes as all long-memory parameters are statistically significant.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 64 (2012)
Issue (Month): 4 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconbus
Metal returns volatility; Volatility persistence; FIGARCH; Financialization;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tully, Edel & Lucey, Brian M., 2007. "A power GARCH examination of the gold market," Research in International Business and Finance, Elsevier, vol. 21(2), pages 316-325, June.
- Shaun K. Roache, 2008. "Commodities and the Market Price of Risk," IMF Working Papers 08/221, International Monetary Fund.
- Clinton Watkins & Michael McAleer, 2004. "Econometric modelling of non-ferrous metal prices," Journal of Economic Surveys, Wiley Blackwell, vol. 18(5), pages 651-701, December.
- Bruce Bjornson & Colin A. Carter, 1997. "New Evidence on Agricultural Commodity Return Performance under Time-Varying Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 918-930.
- Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
- Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996.
"Fractionally integrated generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 74(1), pages 3-30, September.
- Tom Doan, . "RATS programs to replicate Baillie, Bollerslev, Mikkelson FIGARCH results," Statistical Software Components RTZ00009, Boston College Department of Economics.
- Clair H. Redmond & Frederick W. Cubbage, 1988. "Portfolio Risk and Returns from Timber Asset Investments," Land Economics, University of Wisconsin Press, vol. 64(4), pages 325-337.
- Carter, Colin A & Rausser, Gordon C & Schmitz, Andrew, 1983.
"Efficient Asset Portfolios and the Theory of Normal Backwardation,"
Journal of Political Economy,
University of Chicago Press, vol. 91(2), pages 319-31, April.
- Carter, Colin A. & Rausser, Gordon C. & Schmitz, Andrew, 1982. "Efficient asset portfolios and the theory of normal backwardation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt59c8m4x6, Department of Agricultural & Resource Economics, UC Berkeley.
- Carter, Colin A. & Rausser, Gordon C. & Schmitz, Andrew, 1982. "Efficient asset portfolios and the theory of normal backwardation," CUDARE Working Paper Series 133R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Mico Loretan, 2005. "Indexes of the foreign exchange value of the dollar," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Win, pages 1-8.
- Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
- Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
- Dietrich Domanski & Alexandra Heath, 2007. "Financial investors and commodity markets," BIS Quarterly Review, Bank for International Settlements, March.
- Connolly, Robert & Stivers, Chris & Sun, Licheng, 2005. "Stock Market Uncertainty and the Stock-Bond Return Relation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 161-194, March.
- Hammoudeh, Shawkat & Yuan, Yuan, 2008. "Metal volatility in presence of oil and interest rate shocks," Energy Economics, Elsevier, vol. 30(2), pages 606-620, March.
- Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
- Brunetti, Celso & Gilbert, Christopher L., 2000.
"Bivariate FIGARCH and fractional cointegration,"
Journal of Empirical Finance,
Elsevier, vol. 7(5), pages 509-530, December.
- Paul Cashin & Hong Liang & C. John McDermott, 2000.
"How Persistent Are Shocks to World Commodity Prices?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 47(2), pages 2.
- Hong Liang & C. John McDermott & Paul Cashin, 1999. "How Persistent Are Shocks to World Commodity Prices?," IMF Working Papers 99/80, International Monetary Fund.
- Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
- Hyun J. Jin & Darren L. Frechette, 2004. "Fractional Integration in Agricultural Futures Price Volatilities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 432-443.
- Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
- Andrew W. Lo, 1989.
"Long-term Memory in Stock Market Prices,"
NBER Working Papers
2984, National Bureau of Economic Research, Inc.
- Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
- Banerjee, Prithviraj S. & Doran, James S. & Peterson, David R., 2007. "Implied volatility and future portfolio returns," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3183-3199, October.
- Wei, Yu & Wang, Yudong & Huang, Dengshi, 2010. "Forecasting crude oil market volatility: Further evidence using GARCH-class models," Energy Economics, Elsevier, vol. 32(6), pages 1477-1484, November.
- Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
- Akgiray, Vedat, et al, 1991. "Conditional Dependence in Precious Metal Prices," The Financial Review, Eastern Finance Association, vol. 26(3), pages 367-86, August.
- Bernard Goodman, 1956. "The Price Of Gold And International Liquidity," Journal of Finance, American Finance Association, vol. 11(1), pages 15-28, 03.
- Solt, Michael E & Swanson, Paul J, 1981. "On the Efficiency of the Markets for Gold and Silver," The Journal of Business, University of Chicago Press, vol. 54(3), pages 453-78, July.
- Bollerslev, Tim & Ole Mikkelsen, Hans, 1996.
"Modeling and pricing long memory in stock market volatility,"
Journal of Econometrics,
Elsevier, vol. 73(1), pages 151-184, July.
- Tom Doan, . "RATS program to replicate Bollerslev-Mikkelson(1996) FIEGARCH models," Statistical Software Components RTZ00173, Boston College Department of Economics.
- Bollerslev, Tim & Ole Mikkelsen, Hans, 1999. "Long-term equity anticipation securities and stock market volatility dynamics," Journal of Econometrics, Elsevier, vol. 92(1), pages 75-99, September.
- repec:ipg:wpaper:9 is not listed on IDEAS
- Chkili, Walid & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2014.
"Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory,"
Elsevier, vol. 41(C), pages 1-18.
- Walid Chkili & Shawkat Hammoudeh & Duc Khuong Nguyen, 2014. "Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory," Working Papers 2014-389, Department of Research, Ipag Business School.
- Walid Chkili & Shawkat Hammoudeh & Duc Khuong Nguyen, 2014. "Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory," Working Papers 2014-325, Department of Research, Ipag Business School.
- repec:ipg:wpaper:201409 is not listed on IDEAS
- Sinha, Pankaj & Mathur, Kritika, 2013. "A study on the Price Behavior of Base Metals traded in India," MPRA Paper 47028, University Library of Munich, Germany.
- Sensoy, Ahmet, 2013. "Dynamic relationship between precious metals," Resources Policy, Elsevier, vol. 38(4), pages 504-511.
- Walid Chkili & Shawkat Hammoudeh & Duc Khuong Nguyen, 2013. "Long memory and asymmetry in the volatility of commodity markets and Basel Accord: choosing between models," Working Papers 2013-009, Department of Research, Ipag Business School.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.