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What Explains High Commodity Price Volatility? Estimating a Unified Model of Common and Commodity-Specific, High- and Low-Frequency Factors

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  • Karali, Berna
  • Power, Gabriel J.

Abstract

We estimate a model of common and commodity-specific, high- and low-frequency factors, built on the spline-GARCH model of Engle and Rangel (2008) to explain the period of exceptionally high price volatility in commodity markets during 2006-2008. We find that decomposing realized volatility into high- and low-frequency components reveals the impact of slowly-evolving macroeconomic variables on the price volatility. Further, we find that while macroeconomic variables have similar effects within the same commodity category (e.g., storable agricultural), they have different effects across commodity groups (e.g., live stock versus energy).

Suggested Citation

  • Karali, Berna & Power, Gabriel J., 2009. "What Explains High Commodity Price Volatility? Estimating a Unified Model of Common and Commodity-Specific, High- and Low-Frequency Factors," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49576, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea09:49576
    DOI: 10.22004/ag.econ.49576
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    References listed on IDEAS

    as
    1. Jane Black & Ian Tonks, 2000. "Time series volatility of commodity futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(2), pages 127-144, February.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
    4. Mark, Darrell R. & Brorsen, B. Wade & Anderson, Kim B. & Small, Rebecca M., 2008. "Price Risk Management Alternatives for Farmers in the Absence of Forward Contracts with Grain Merchants," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 23(2), pages 1-4.
    5. Robert F. Engle & Jose Gonzalo Rangel, 2008. "The Spline-GARCH Model for Low-Frequency Volatility and Its Global Macroeconomic Causes," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1187-1222, May.
    6. Berna Karali & Walter N. Thurman, 2009. "Announcement effects and the theory of storage: an empirical study of lumber futures," Agricultural Economics, International Association of Agricultural Economists, vol. 40(4), pages 421-436, July.
    7. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
    8. Ronald W. Anderson, 1985. "Some determinants of the volatility of futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(3), pages 331-348, September.
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