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Commodities volatility and the theory of storage

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  • CARPANTIER, Jean-François

    ()
    (Université catholique de Louvain, IRES, Belgium; CREA, University of Luxembourg)

  • DUFAYS, Arnaud

    ()
    (Université catholique de Louvain, CORE, Belgium)

Abstract

One implication of the theory of storage states that commodity price volatility should increase when inventories are low. We document this volatility feature by estimating asymmetric volatility models for 16 commodity return series, on the period 1994-2011 and show how to account for this feature in Value-at-Risk forecasting. Our contribution is threefold: (i) This study is the first to investigate systematically the volatility implication of the theory of storage for a large panel of commodity types (agriculturals, metals, precious metals and tree crops); (ii) Since inventories are hard to measure and define, especially for high frequency data, we use in the volatility model positive return shocks as a new original proxy for inventories; (iii) We finally develop an original asymmetric version of the spline GARCH model and find that the inventory effect remains robust if we allow the unconditional variance to vary over time.

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File URL: http://uclouvain.be/cps/ucl/doc/core/documents/coredp2012_37web.pdf
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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2012037.

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Date of creation: 11 Oct 2012
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Handle: RePEc:cor:louvco:2012037

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Related research

Keywords: asymmetries; commodities; inventory spline GARCH; VaR;

References

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