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What Explains High Commodity Price Volatility? Estimating a Unified Model of Common and Commodity-Specific, High- and Low-Frequency Factors

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  • Karali, Berna
  • Power, Gabriel J.

Abstract

We estimate a model of common and commodity-specific, high- and low-frequency factors, built on the spline-GARCH model of Engle and Rangel (2008) to explain the period of exceptionally high price volatility in commodity markets during 2006-2008. We find that decomposing realized volatility into high- and low-frequency components reveals the impact of slowly-evolving macroeconomic variables on the price volatility. Further, we find that while macroeconomic variables have similar effects within the same commodity category (e.g., storable agricultural), they have different effects across commodity groups (e.g., live stock versus energy).

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49576.

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Date of creation: 2009
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Handle: RePEc:ags:aaea09:49576

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Keywords: volatility; spline-GARCH; futures markets; Agricultural Finance; Demand and Price Analysis;

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References

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  1. Ian Tonks & Jane Black, 1999. "Time Series Volatility Commodity Futures Prices," FMG Discussion Papers dp331, Financial Markets Group.
  2. Karali, Berna & Thurman, Walter N., 2007. "Announcement Effects and the Theory of Storage: An Empirical Study of Lumber Futures," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9865, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
  4. Robert F. Engle & Jose Gonzalo Rangel, 2008. "The Spline-GARCH Model for Low-Frequency Volatility and Its Global Macroeconomic Causes," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1187-1222, May.
  5. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  6. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  7. Mark, Darrell R. & Brorsen, B. Wade & Anderson, Kim B. & Small, Rebecca M., 2008. "Price Risk Management Alternatives for Farmers in the Absence of Forward Contracts with Grain Merchants," Choices, Agricultural and Applied Economics Association, vol. 23(2).
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Cited by:
  1. von Braun, Joachim & Tadesse, Getaw, 2012. "Global Food Price Volatility and Spikes: An Overview of Costs, Causes, and Solutions," Discussion Papers 120021, University of Bonn, Center for Development Research (ZEF).
  2. Ott, Herve, 2012. "Which factors drive which volatility in the grain sector?," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122486, European Association of Agricultural Economists.

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