Jumps in energy and non‐energy commodities

• Author: Elie Bouri,Rangan Gupta
• Published date: 01 March 2020
• DOI: http://doi.org/10.1111/opec.12171
• Date: 01 March 2020

Jumps in energy and non-energy

commodities

Elie Bouri* and Rangan Gupta**

*USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon. Email: eliebouri@usek.edu.lb

**Department of Economics, University of Pretoria, Pretoria0002, South Africa. Email:

rangan.gupta@up.ac.za

Abstract

Jumps in the price process of assets represent a sort of tail risk and are found to affect many aspects

of asset pricing, volatility modelling and asset allocation. In this paper, we detect price jumps in the

realised volatility series of a wide set of commodity futures and find evidence of jumpy behaviour,

especially in energy and agricultural commodities. We examine whether the realised volatilities of

commodity futures jump together and find evidence that cojumping is significant and generally

clustered within the commodity groups, suggesting some sort of segmentation regarding the tail

risk behaviour across energy, agricultural and metals commodities. Additional analysis shows that

price jumps and macroeconomic news surprises tend to occur together in specific commodities

such as crude oil, which confirms earlier findings about the sensitivity of crude oil to news about

the economy.

1. Introduction

The commodity markets have grown to become an important investment destination for

various investors, portfolio managers, hedgers and other risk managers (Bessler and

Wolff, 2015; Rehman et al., 2019; Ali et al., 2020). Their characteristics and activities

also matter to commodity producers who rely on the commodity markets as the main

outlet for pricing their transaction activities, including hedging operations. Interestingly,

volatility jumps are not uncommon in commodity markets that have experienced booms

and busts over the last two decades and increased integration resulting from, among other

things, biofuel expansion (Ji et al., 2018) and financialisation (Tang and Xiong, 2012)

1

.

The seminal work of Barndorff-Nielsen and Shephard (2004) emphasises the

importance of jumps, which can reflect, according to Bates (2000), crash risk, i.e. tail

risk. Motivated by the availability of high-frequency data, numerous later studies (e.g.

Corsi et al., 2010; Huang, 2016; Charles and Darn

e, 2017; Ma et al., 2017; Zhu et al.,

2017; Gkillas et al., 2018; Da Fonseca and Ignatieva, 2019) examine the jumps in

various asset classes, providing important evidence of the impact of jumps on assets. It is

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often argued that the volatility of asset prices can be jumpy due to the presence of

extreme shocks such as economic, financial and geopolitical events. For example,

Lahaye et al. (2011) indicate that macroeconomic news might be a relevant driver of

jumps in financial markets. Interestingly, Eraker (2004) and Driessen and Maenhout

(2013) indicate that volatility jumps are important and have an impact on assets.

The volatility of commodities is the subject of numerous studies focusing on

modelling techniques, spillovers and connectedness (Creti et al., 2013; Nazlioglu et al.,

2013; Beckmann and Czudaj, 2014; Mensi et al., 2014; Sadorsky, 2014). However, less

attention is given to jumps and cojumps in the commodity markets that constitute

various groups such as energy, agricultural and metals (see, among others, Chevallier

and Ielpo (2014) and S

evi (2014), who overview the jump activities in commodity

markets). Charles and Darn

e (2017) focus on jumps in crude oil while forecasting

volatility, whereas Bouri (2019) detects price discontinuities in the sovereign risk of oil

exporters and relates them to price discontinuities in crude oil. As argued by Da Fonseca

and Ignatieva (2019), most of the existing literature considers the jumps in a single asset,

highlighting the need to extend the literature to cover the jump activity among several

assets. Much recently, Nguyen and Prokopczuk (2019) consider the price jumps in

commodity markets within a calendar month and report evidence that jumps are rare

events. However, studies examining jumps in the price process of the realised volatility

of commodity prices are unprecedented. Given this, and the above discussion, we extend

the related literature by analysing jumps and cojumps in the price process of the realised

volatility of commodity markets. Specifically, we detect the price jump behaviour in a

wide set of commodity futures via the approach of Laurent et al. (2016), which is

conducted within GARCH-based models. Then, we uncover evidence of cojumps by

applying various approaches. Finally, we examine whether jumps and cojumps are

associated with macroeconomic news surprises.

Uncovering these issues is essential for financial derivatives, given that the jump

activity of a financial product can be closely related to that of its underlying asset. For

example, most advanced options pricing models now take into account jump activity

(e.g. Driessen and Maenhout, 2013). Uncovering jump behaviour is also particularly

important in the framework of hedging the risk of a derivative product and enhancing the

volatility of prediction models. For example, Corsi et al. (2010) and Ma et al. (2017)

indicate that jumps can increase future volatility.

Our main results show that the realised volatility of most commodity futures is

subject to jumps and that there is a significant and positive contemporaneous association

across the jumps, especially in the agricultural commodity. Further analysis shows that

jumps tend to be associated with macroeconomic news surprises, especially for crude oil.

The rest of the paper is split into four sections. Section 2 describes the construction

of daily realised data on various commodity futures. Section 3 presents the methods used

OPEC Energy Review March 2020 ©2020 Organization of the Petroleum Exporting Countries

92 Elie Bouri and Rangan Gupta