Does a Nexus Exist between Implied Volatility and Storage Regimes in Agricultural Commodities?

Alankrita Goswami and Berna Karali

No 309627, 2019 Conference, April 15-16, 2019, Minneapolis, Minnesota from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: Considering that Working curve is a well-established stylized fact and that backwardation exists in the grain markets, we build upon the existing literature to explore the nexus between implied volatility (IV) and storage regimes in substitute agricultural commodity markets. We use a substitute-commodity market-setup of corn and soybean to account for any spillovers across their physical-market fundamentals. The impact of commodity fundamentals (production-related information and storage), macroeconomic indicators and financial market-variables is studied on nearby and deferred implied volatility series; the analysis is carried out both at daily and weekly frequency. In fact, we do find the spillovers across the production-related information disappear in the weekly analysis; thus, suggesting the need to account for early-impact of such information on a daily-basis for modeling the uncertainty levels. The distinct reaction of implied volatility of different maturity periods (i.e., nearby and deferred) to the commodity-fundamentals highlights that not only the two IV series behave differently during episodes of contango and backwardation, but also that they behave differently from each other during the two storagescenarios. Therefore, our study makes crucial additions to the existing works and emphasizes the need to acknowledge the differing behavior of the nearby and far-out IV levels during episodes of contango and backwardation in the grain markets.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 15
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ags:n13419:309627

DOI: 10.22004/ag.econ.309627

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