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Factor Structure in Commodity Futures Return and Volatility

Author

Listed:
  • Peter Christoffersen

    (University of Toronto and CREATES)

  • Asger Lunde

    (Aarhus University and CREATES)

  • Kasper V. Olesen

    (Aarhus University and CREATES)

Abstract

Using data on more than 750 million futures trades during 2004-2013, we analyze eight stylized facts of commodity price and volatility dynamics in the post financialization period. We pay particular attention to the factor structure in returns and volatility and to commodity market integration with the equity market. We find evidence of a factor structure in daily commodity futures returns. However, the factor structure in daily commodity futures volatility is even stronger than in returns. When computing model-free realized commodity betas with the stock market we find that they were high during 2008-2010 but have since returned to the pre-crisis level close to zero. The common factor in commodity volatility is nevertheless clearly related to stock market volatility. We conclude that, while commodity markets appear to again be segmented from the equity market when only returns are considered, commodity volatility indicates a nontrivial degree of market integration.

Suggested Citation

  • Peter Christoffersen & Asger Lunde & Kasper V. Olesen, 2014. "Factor Structure in Commodity Futures Return and Volatility," CREATES Research Papers 2014-31, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2014-31
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    References listed on IDEAS

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    More about this item

    Keywords

    Factor structure; financial volatility; beta; high-frequency data; commodities; financialization;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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