IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v22y2012i2p395-422.html
   My bibliography  Save this article

Commodity volatility breaks

Author

Listed:
  • Vivian, Andrew
  • Wohar, Mark E.

Abstract

Volatility is a key determinant of derivative prices and optimal hedge ratios. This paper examines whether there are structural breaks in commodity spot return volatility using an iterative cumulative sum of squares procedure and then uses GARCH (1,1) to model volatility during each regime.

Suggested Citation

  • Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 395-422.
    • Handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:395-422
    DOI: 10.1016/j.intfin.2011.12.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S104244311100093X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2011.12.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bradley T. Ewing & Farooq Malik, 2010. "Estimating Volatility Persistence in Oil Prices Under Structural Breaks," The Financial Review, Eastern Finance Association, vol. 45(4), pages 1011-1023, November.
    2. Paul Cashin & C. John McCDermott, 2002. "The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 1-2.
    3. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425, June.
    4. David McMillan & Mark Wohar, 2011. "Structural breaks in volatility: the case of UK sector returns," Applied Financial Economics, Taylor & Francis Journals, vol. 21(15), pages 1079-1093.
    5. Elena Andreou & Eric Ghysels, 2002. "Detecting multiple breaks in financial market volatility dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 579-600.
    6. Serena Ng & Francisco J. Ruge-Murcia, 2000. "Explaining the Persistence of Commodity Prices," Computational Economics, Springer;Society for Computational Economics, vol. 16(1/2), pages 149-171, October.
    7. Sangyeol Lee & Siyun Park, 2001. "The Cusum of Squares Test for Scale Changes in Infinite Order Moving Average Processes," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 28(4), pages 625-644, December.
    8. Abbott, Philip C. & Hurt, Christopher & Tyner, Wallace E., 2008. "What's Driving Food Prices?," Issue Reports 37951, Farm Foundation.
    9. Regnier, Eva, 2007. "Oil and energy price volatility," Energy Economics, Elsevier, vol. 29(3), pages 405-427, May.
    10. Stout Lynn A., 2011. "Risk, Speculation, and OTC Derivatives: An Inaugural Essay for Convivium," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 1(1), pages 1-15, January.
    11. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
    12. David S. Jacks & Kevin H. O'Rourke & Jeffrey G. Williamson, 2011. "Commodity Price Volatility and World Market Integration since 1700," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 800-813, August.
    13. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    14. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 631-653.
    15. Bahattin Buyuksahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 167-202.
    16. Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M., 2010. "The macroeconomic determinants of volatility in precious metals markets," Resources Policy, Elsevier, vol. 35(2), pages 65-71, June.
    17. David E. Rapach & Jack K. Strauss, 2008. "Structural breaks and GARCH models of exchange rate volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 65-90.
    18. Wang, Ping & Moore, Tomoe, 2009. "Sudden changes in volatility: The case of five central European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 33-46, February.
    19. Adair Turner & Jon Farrimond & Jonathan Hill, 2011. "The oil trading markets, 2003--10: analysis of market behaviour and possible policy responses," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(1), pages 33-67, Spring.
    20. McMillan, David G. & Ruiz, Isabel, 2009. "Volatility persistence, long memory and time-varying unconditional mean: Evidence from 10 equity indices," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 578-595, May.
    21. Chan, Kalok & Chan, K C & Karolyi, G Andrew, 1991. "Intraday Volatility in the Stock Index and Stock Index Futures Markets," The Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 657-684.
    22. Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013. "The Fundamentals of Commodity Futures Returns," Review of Finance, European Finance Association, vol. 17(1), pages 35-105.
    23. Engle, Robert F & Susmel, Raul, 1993. "Common Volatility in International Equity Markets," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 167-176, April.
    24. Thomas Mikosch & Cătălin Stărică, 2004. "Nonstationarities in Financial Time Series, the Long-Range Dependence, and the IGARCH Effects," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 378-390, February.
    25. Ng, Victor K & Pirrong, Stephen Craig, 1994. "Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices," The Journal of Business, University of Chicago Press, vol. 67(2), pages 203-230, April.
    26. de Pooter, M.D. & van Dijk, D.J.C., 2004. "Testing for changes in volatility in heteroskedastic time series - a further examination," Econometric Institute Research Papers EI 2004-38, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    27. GIOT, Pierre, 2003. "The Asian financial crisis : the start of a regime switch in volatility," LIDAM Discussion Papers CORE 2003078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    28. Jianping Mei & Limin Guo, 2004. "Political Uncertainty, Financial Crisis and Market Volatility," European Financial Management, European Financial Management Association, vol. 10(4), pages 639-657, December.
    29. Ewing, Bradley T. & Malik, Farooq, 2005. "Re-examining the asymmetric predictability of conditional variances: The role of sudden changes in variance," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2655-2673, October.
    30. Hillebrand, Eric, 2005. "Neglecting parameter changes in GARCH models," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 121-138.
    31. Calvo-Gonzalez, Oscar & Shankar, Rashmi & Trezzi, Riccardo, 2010. "Are commodity prices more volatile now ? a long-run perspective," Policy Research Working Paper Series 5460, The World Bank.
    32. Ewing, Bradley T. & Malik, Farooq & Ozfidan, Ozkan, 2002. "Volatility transmission in the oil and natural gas markets," Energy Economics, Elsevier, vol. 24(6), pages 525-538, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ewing, Bradley T. & Malik, Farooq, 2016. "Volatility spillovers between oil prices and the stock market under structural breaks," Global Finance Journal, Elsevier, vol. 29(C), pages 12-23.
    2. David McMillan & Mark Wohar, 2011. "Structural breaks in volatility: the case of UK sector returns," Applied Financial Economics, Taylor & Francis Journals, vol. 21(15), pages 1079-1093.
    3. Charles, Amélie & Darné, Olivier, 2014. "Volatility persistence in crude oil markets," Energy Policy, Elsevier, vol. 65(C), pages 729-742.
    4. Ewing, Bradley T. & Malik, Farooq, 2013. "Volatility transmission between gold and oil futures under structural breaks," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 113-121.
    5. Shalini, Velappan & Prasanna, Krishna, 2016. "Impact of the financial crisis on Indian commodity markets: Structural breaks and volatility dynamics," Energy Economics, Elsevier, vol. 53(C), pages 40-57.
    6. Babikir, Ali & Gupta, Rangan & Mwabutwa, Chance & Owusu-Sekyere, Emmanuel, 2012. "Structural breaks and GARCH models of stock return volatility: The case of South Africa," Economic Modelling, Elsevier, vol. 29(6), pages 2435-2443.
    7. Arouri, Mohamed El Hédi & Lahiani, Amine & Lévy, Aldo & Nguyen, Duc Khuong, 2012. "Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models," Energy Economics, Elsevier, vol. 34(1), pages 283-293.
    8. David E. Rapach & Jack K. Strauss, 2008. "Structural breaks and GARCH models of exchange rate volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 65-90.
    9. Caporin, Massimiliano & Malik, Farooq, 2020. "Do structural breaks in volatility cause spurious volatility transmission?," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 60-82.
    10. Xu, Ke-Li, 2013. "Powerful tests for structural changes in volatility," Journal of Econometrics, Elsevier, vol. 173(1), pages 126-142.
    11. Mustafa Okur & Emrah Cevik, 2013. "Testing Intraday Volatility Spillovers in Turkish Capital Markets: Evidence from Ise," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 26(3), pages 99-116, January.
    12. Dennis Alvaro & Ángel Guillén & Gabriel Rodríguez, 2017. "Modelling the volatility of commodities prices using a stochastic volatility model with random level shifts," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(1), pages 71-103, February.
    13. Korkmaz, Turhan & Çevik, Emrah İ. & Atukeren, Erdal, 2012. "Return and volatility spillovers among CIVETS stock markets," Emerging Markets Review, Elsevier, vol. 13(2), pages 230-252.
    14. Gebka, Bartosz & Wohar, Mark E., 2013. "Causality between trading volume and returns: Evidence from quantile regressions," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 144-159.
    15. Hillebrand, Eric & Schnabl, Gunther & Ulu, Yasemin, 2009. "Japanese foreign exchange intervention and the yen-to-dollar exchange rate: A simultaneous equations approach using realized volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 490-505, July.
    16. Ewing, Bradley T. & Malik, Farooq, 2005. "Re-examining the asymmetric predictability of conditional variances: The role of sudden changes in variance," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2655-2673, October.
    17. Mofleh Alshogeathri & Jamel Jouini, 2017. "Linkages Between Equity and Global Food Markets: New Evidence from Including Structural Changes," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 67(3), pages 166-198, June.
    18. Hasanov, Akram Shavkatovich & Poon, Wai Ching & Al-Freedi, Ajab & Heng, Zin Yau, 2018. "Forecasting volatility in the biofuel feedstock markets in the presence of structural breaks: A comparison of alternative distribution functions," Energy Economics, Elsevier, vol. 70(C), pages 307-333.
    19. Kostyrka, Andreï & Malakhov, Dmitry, 2021. "Was there ever a shift: Empirical analysis of structural-shift tests for return volatility," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 61, pages 110-139.
    20. Yıldırım, Durmuş Çağrı & Cevik, Emrah Ismail & Esen, Ömer, 2020. "Time-varying volatility spillovers between oil prices and precious metal prices," Resources Policy, Elsevier, vol. 68(C).

    More about this item

    Keywords

    Commodity spot returns; GARCH; Structural breaks;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:395-422. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.