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Long memory and asymmetry in the volatility of commodity markets and Basel Accord: choosing between models

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  • Walid Chkili
  • Shawkat Hammoudeh
  • Duc Khuong Nguyen

Abstract

This paper explores the relevance of asymmetry and long memory in modeling and forecasting the conditional volatility and market risk of four major commodities (crude oil, natural gas, gold, and sil- ver). A broad set of the most popular linear and nonlinear GARCH-type models is used to investigate this relevancy. Our in-sample and out-of-sample results show that volatility of commodity returns can be better described by nonlinear volatility models accommodating the long memory and asymmetry features. In particular, the FIAPARCH model is found to be the best suited for estimating the VaR forecasts for both short and long trading positions. This model also gives for all four commodities the lowest number of violations under the Basel II Accord rule, given a risk exposure at the 99% confi- dence level. Several implications for commodity market risks, policy regulations and hedging strategies can be drawn from the obtained results.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2013-009.

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Length: 34 pages
Date of creation: 09 May 2013
Date of revision:
Handle: RePEc:ipg:wpaper:2013-009

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Related research

Keywords: commodity markets; GARCH models; asymmetries; long memory; volatility forecasts.;

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References

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