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Modeling and Forecasting Commodity Market Volatility with Long-term Economic and Financial Variables

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  • Thomas Walther

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  • Duc Khuong Nguyen

Abstract

This paper investigates the time-varying volatility patterns of some major commodities as well as the potential factors that drive their long-term volatility component. For this purpose, we make use of a recently proposed GARCH-MIDAS approach which typically allows us to examine the role of economic and financial variables of different frequencies. Using commodity futures for Crude Oil (WTI and Brent), Gold, Silver and Platinum as well as a commodity index, our results show the necessity of disentangling the short-term and long-term components in modeling and forecasting commodity volatility. They also indicate that the long-term volatility of most commodity futures is significantly driven by the level of the global real economic activity as well as the changes in consumer sentiment, industrial production, and economic policy uncertainty. However, the forecasting results are not alike across commodity futures as no single model fits all commodities.

Suggested Citation

  • Thomas Walther & Duc Khuong Nguyen, 2018. "Modeling and Forecasting Commodity Market Volatility with Long-term Economic and Financial Variables," Working Papers on Finance 1824, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2018:24
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    Cited by:

    1. repec:gam:jeners:v:11:y:2018:i:5:p:1207-:d:145404 is not listed on IDEAS
    2. Thomas Walther & Tony Klein, 2018. "Exogenous Drivers of Cryptocurrency Volatility - A Mixed Data Sampling Approach To Forecasting," Working Papers on Finance 1815, University of St. Gallen, School of Finance.
    3. repec:gam:jijfss:v:6:y:2018:i:4:p:89-:d:179491 is not listed on IDEAS

    More about this item

    Keywords

    Commodity futures; GARCH; Long-term volatility; Macroeconomic effects; Mixed data sampling.;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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