Do seasonality, break and spillover effects explain commodity price volatility

Debashish Maitra

Journal of Agribusiness in Developing and Emerging Economies, 2018, vol. 8, issue 1, 144-170

Abstract: Purpose - The purpose of this paper is to understand the volatility in commodity futures and spot markets. The study starts with a few questions: first, the effect of seasonality on the volatility is studied. Thereafter, the presence of structural breaks in the variance is identified. At last the seasonality, structural shifts and spillover effects are examined together to find out their effects on volatility. Design/methodology/approach - The methodology heavily employs econometric tools and techniques. The monthly seasonal dummies are incorporated to identify the effects of seasonality on volatility. Then, the presence of break in volatility is tested by cumulative sum of squares (CUSUM test), followed by generalized autoregressive conditional heteroscedastictity and EGARCH models are measured by including seasonal dummies, break dummies and the residuals of other market in the variance equation to determine spillover effects. Findings - It is found that the effects of seasonality on volatility cannot be ignored as the effects are significant. The presence of asymmetry is detected in all the commodities. The presence of seasonality and structural breaks in the variance equation are statistically able to reduce the volatility but the magnitude is very negligible with an exception in cumin futures markets. Bi-directional volatility spillover between futures and spot markets is observed in all the commodities and the effect of spillover is more from spot markets to the futures markets. Research limitations/implications - This study is limited to a few agro commodities which are well traded. This study could have been extended to the other thinly traded commodities. This study has also taken only near month futures contracts as it contains more information but the same could have been studied by taking far month contracts also. Originality/value - The present study attempted to understand the conjugated effects of seasonality, structural breaks and spillover on volatility of commodity markets which is not apparent in the previous studies. This study has also employed methodological rigor to identify the breaks in the variance equation. In addition to this it has also investigated whether Indian commodity futures markets are informationally more efficient than the spot markets.

Keywords: Commodity markets; Volatility; Seasonality; Spillover effects; Breaks (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jadeep:jadee-04-2015-0019

DOI: 10.1108/JADEE-04-2015-0019

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