Asymmetric Volatility in Commodity Markets

The paper studies the return-volatility relationship in a range of commodities. We develop a commodity price model and show that the volatility of price changes can be positively or negatively related to demand shocks. An “inverse leverage effect” – the volatility is higher following positive price shocks – is found in more than half of the daily spot prices. The effect is weaker in 3-month futures market and monthly historical volatility measures. Only crude oil exhibits a “leverage effect” – a higher volatility follows a negative shock, and the reason is explored in the context of its special market structure