The Relation between Return and Volatility in the Commodity Markets

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