Macro factors and the realized volatility of commodities: A dynamic network analysis
Min Hu1, Dayong Zhang1, Qiang Ji2,3
1Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China.
Resources Policy
|June 26, 2021
Summary
Macroeconomic factors significantly influence commodity futures volatility, with impacts varying by commodity. Economic policy uncertainty, investor sentiment, and geopolitical risks play key roles in market fluctuations.
Area of Science:
- Commodity Markets
- Financial Economics
- Econometrics
Background:
- Commodity futures markets are susceptible to various macroeconomic and geopolitical influences.
- Understanding these influences is crucial for risk management and investment strategies.
- Previous research has not fully captured the dynamic interconnectedness between macro factors and commodity volatility.
Purpose of the Study:
- To investigate the dynamic relationship between key macro-factors and the realized volatility of major commodity futures (soybeans, gold, crude oil).
- To identify which specific macro-factors most significantly impact the volatility of different commodities.
- To analyze the time-varying nature of these influences on commodity markets.
Main Methods:
- Utilized high-frequency data for soybeans, gold, and crude oil futures.
- Selected six macro-economic indicators: economic policy uncertainty (EPU), economic surprise index (ESI), default spread (DEF), investor sentiment index (SI), volatility index (VIX), and geopolitical risk index (GPR).
- Employed a dynamic connectedness network to analyze the interdependencies and contributions of macro factors to commodity volatility.
Main Results:
- Distinctive reactions to macro shocks were observed across commodities.
- Crude oil and gold futures showed higher reactivity to investor sentiment (SI) and market volatility (VIX).
- Default spread (DEF) was the primary driver of soybean futures volatility, while macroeconomic factors and geopolitical risks (GPR) were more relevant to crude oil.
Conclusions:
- Macroeconomic factors and geopolitical risks exhibit a time-varying influence on commodity futures realized volatility.
- The specific impact of macro shocks differs significantly across commodities, highlighting the need for tailored analytical approaches.
- The dynamic connectedness network effectively illustrates the complex interplay between macro-financial indicators and commodity market behavior.
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