The Relation between Return and Volatility in the Commodity Markets

Posted: 21 Jul 2004 Last revised: 24 Mar 2008

See all articles by Daniel Giamouridis

Daniel Giamouridis

Bank of America - Bank of America Merrill Lynch; City University London - Cass Business School - Faculty of Finance; EDHEC Risk Institute

Michael Tamvakis

City University London - The Business School

Abstract

The relationship between stock market returns and volatilities has been extensively investigated in the academic literature. In this paper the relationship between Commodity Returns and volatility is investigated for the first time. We shared the feeling that the relationship between return and volatility in the commodity markets is the inverse of that observed in the stock markets. If that hypothesis proves to be true and if commodity markets returns are negatively correlated with the returns of traditional financial assets, the introduction of commodities in investment portfolios would result in the diversification of the volatility exposure. This will allow Fund Managers to hedge investment portfolios with commodities, thus avoiding the use of more complicated instruments, such as options. We carry out the exploratory tests of Black [1976], to test the hypothesis with the unconditional variance, as well as the tests of Nelson [1991], Zakoian [1990] and Glosten, Jagannathan, and Runkle [1993], to test the hypothesis on the conditional variance. The estimation of the models yields statistically significant asymmetric terms only for the conditional variance and the initial hypothesis that the conditional variance responds asymmetrically to past information is not rejected.

JEL Classification: C22, G11

Suggested Citation

Giamouridis, Daniel and Tamvakis, Michael, The Relation between Return and Volatility in the Commodity Markets. Journal of Alternative Investments, Vol. 22, No.1, pp. 54-62, Summer 2001, Available at SSRN: https://ssrn.com/abstract=566421

Daniel Giamouridis (Contact Author)

Bank of America - Bank of America Merrill Lynch ( email )

United Kingdom

City University London - Cass Business School - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

EDHEC Risk Institute ( email )

Lille
France

Michael Tamvakis

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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