Volatility dynamics in energy and agriculture markets: An analysis of domestic and global uncertainty factors

Simran and Anil K. Sharma

Journal of Financial Economic Policy, 2024, vol. 16, issue 5, 580-600

Abstract: Purpose - This study aims to explore the intricate relationship between uncertainty indicators and volatility of commodity futures, with a specific focus on agriculture and energy sectors. Design/methodology/approach - The authors analyse the volatility of Indian agriculture and energy futures using the GARCH-MIDAS model, taking into account different types of uncertainty factors. The evaluation of out-sample predictive capability involves the application of out-sampleR-squared test and computation of various loss functions. Findings - The research outcomes underscore the significant impact of diverse uncertainty factors such as domestic economic policy uncertainty (EPU), global EPU (GEPU), US EPU and geopolitical risk (GPR) on long-run volatility of Indian energy and agriculture (agri) futures. Additionally, the study demonstrates that GPR exhibits superior predictive capability for crude oil futures volatility, while domestic EPU stands out as an effective predictor for agri futures, particularly castor seed and guar gum. Practical implications - The study offers practical implications for market participants and policymakers to adopt a comprehensive perspective, incorporating diverse uncertainty factors, for informed decision-making and effective risk management in commodity markets. Originality/value - The research makes an inaugural attempt to examine the impact of domestic and global uncertainty indicators on modelling and predicting volatility in energy and agri futures. The distinctive feature of considering an emerging market also adds a novel dimension to the research landscape.

Keywords: Volatility; Forecasting; Commodity futures; EPU; GARCH-MIDAS (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-12-2023-0398

DOI: 10.1108/JFEP-12-2023-0398

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