The Return-Volatility Relation in Commodity Futures Markets

Carl Chiarella, Boda Kang, Christina Nikitopoulos-Sklibosios () and Thuy-Duong To

No 336, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: By employing a continuous time stochastic volatility model, we analyse the dynamic relation between price returns and volatility changes in the commodity futures markets. We use an extensive daily database of gold and crude oil futures and futures options to estimate the model that is well suited to assess the return–volatility relation for the entire term structure of futures prices. Our empirical results indicate a positive relation in the gold futures market and a negative relation in the crude oil futures market, especially over periods of high volatility principally driven by market-wide shocks. However, the opposite reaction occurs over quiet volatility periods when typically commodity-specific effects dominate. As leverage effect and volatility feedback effect do not adequately explain this reaction especially for the crude oil futures, we propose the convenience yield effect. We demonstrate that commodity futures markets in normal backwardation entail a positive relation, while futures markets in contango entail a negative relation.

Keywords: Return-volatility relation; Commodity futures returns; Gold futures volatility; Crude oil futures volatility; Contango; Backwardation (search for similar items in EconPapers)
JEL-codes: E32 G13 Q40 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-08-01
New Economics Papers: this item is included in nep-agr and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as: Chiarella, C., Kang, B., Sklibosios Nikitopoulos, C. and To, T., 2016, "The Return-Volatility Relation in Commodity Futures Markets", Journal of Futures Markets, 36(2), 127-152.

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp336.pdf (application/pdf)

Related works:
Journal Article: The Return–Volatility Relation in Commodity Futures Markets (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:336

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().