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Economic uncertainty, trading activity, and commodity futures volatility
Author(s) -
Watugala Sumudu W.
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22018
Subject(s) - futures contract , economics , volatility (finance) , financialization , financial economics , econometrics , predictability , contango , volatility swap , volatility risk premium , commodity , commodity market , hedge , volatility smile , implied volatility , finance , mathematics , ecology , statistics , biology
This paper investigates the dynamics of commodity futures volatility. I derive the variance decomposition for the futures basis and show unexpected excess returns result from new information about expected future interest rates, convenience yields, and risk premia. Measures of uncertainty in economic conditions have significant predictive power for realized volatility of commodity futures returns, after controlling for lagged volatility, returns, commodity index trading, hedging pressure, and other trading activity, even during the so‐called “index financialization” period. During this period, hedge fund performance predicts volatility in grain commodities, which are affected by the US ethanol mandate.