The Macroeconomic Determinants of Commodity Futures Volatility: Evidence from Chinese and Indian Markets

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Mo, Di
Gupta, Rakesh
Li, Bin
Singh, Tarlok
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2018
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We examine the macroeconomic determinants of the volatility of commodity futures (including agricultural commodity futures, metal futures and oil futures) in two emerging commodity markets – China and India. The macroeconomic variables used include both domestic and international macroeconomic variables that gauge economic environment, monetary policy and financial market information. We use a recently proposed GARCH-MIDAS model which jointly incorporates the daily price volatility and low-frequency macroeconomic variables. The model decomposes the volatility series into short- and long-run components, thereby enabling us to test whether the macroeconomic variables can determine the long-run variance. We find that there exists a long-run volatility component in the commodity futures, and most of the tested low-frequency macroeconomic variables are positively related to the long-run variance of commodity futures. Our results suggest that both domestic and international macroeconomic information plays an important role in determining the price volatility of the emerging commodity futures.

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Economic Modelling
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70
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Applied economics
Macroeconomics (incl. monetary and fiscal theory)
Econometrics
Banking, finance and investment
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