Modeling the Volatility of Returns on Commodities: An Application and Empirical Comparison of GARCH and SV Models
Abstract
Seven GARCH and stochastic volatility (SV) models are used to model and compare empirically
the volatility of returns on four commodities: gold, copper, oil, and natural gas. The results
show evidence of fat tails and random jumps created by supply/demand imbalances, international
instability episodes, geopolitical tensions, and market speculation, among other factors. We also
find evidence of a leverage effect in oil and copper, resulting from their dependence on world
economic activity; and of an inverse leverage effect in gold and natural gas, consistent with the
formerís role as safe asset and with uncertainty about the latterís future supply. Additionally, in
most cases there is no evidence of an impact of volatility on the mean. Finally, we find that the
best-performing return volatility models are GARCH-t for gold, SV-t for copper and oil, and SV
with leverage effects (SV-L) for natural gas.
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