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Forecasting the Realized Volatility of Agricultural Commodity Prices: Does Sentiment Matter?

Author

Listed:
  • Matteo Bonato

    (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa; IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France)

  • Oguzhan Cepni

    (Copenhagen Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark; Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050, Ankara, Turkey)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Christian Pierdzioch

    (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany)

Abstract

We analyze the out-of-sample predictive power of sentiment for the realized volatility of agricultural commodity price returns. We use high-frequency intra-day data covering the period from 2009 to 2020 to estimate realized volatility. Our baseline forecasting model is a heterogeneous autoregressive (HAR) model, which we extend to include sentiment. We further enhance this model by incorporating various key realized moments such as leverage, realized skewness, realized kurtosis, realized upside (``good”) volatility, realized downside (``bad”) volatility, realized jumps, realized upside tail risk, and realized downside tail risk. In order to setup a forecasting model, we use (i) forward and backward stepwise predictor selection, and, (ii) a model-based averaging algorithm. The forecasting models constructed through these algorithms outperform both the baseline HAR-RV model and the HAR-RV-sentiment model. We conclude that, for the agricultural commodities studied in our research, realized moments play a more significant role in forecasting realized volatility compared to sentiment.

Suggested Citation

  • Matteo Bonato & Oguzhan Cepni & Rangan Gupta & Christian Pierdzioch, 2023. "Forecasting the Realized Volatility of Agricultural Commodity Prices: Does Sentiment Matter?," Working Papers 202316, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202316
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    More about this item

    Keywords

    Realized volatility; Agricultural commodities; Realized moments; Sentiment; Forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General

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