Proceedings of the 5th Economic & Finance Conference, Miami

ASYMMETRIC VOLATILITY OF NET CONVENIENCE YIELD: EVIDENCE FROM INDIAN COMMODITY FUTURES MARKETS

BRAJESH KUMAR

Abstract:

(NCY). It asserts that the positive NCY should have higher volatility as compared to negative NCY. This paper investigates asymmetric volatility behavior of NCY in Indian commodity futures markets. We model NCY as EGARCH process which captures the asymmetry in volatility of the series. The mean equation of NCY is modeled as autoregressive process with month and period dummies. We also include volatility of the spot prices as explanatory variable. Our results of the asymmetric behavior of NCY indicate that the theory of storage is not valid in Indian commodities market. In most of the agricultural commodities, we do not find asymmetric behavior; the negative shock to NCY increases the volatility of NCY rather than decreasing it. This result contradicts the implications of the theory of storage. In other words, when the spot prices are higher than the futures prices (backwardation), the volatility of spread is higher than volatility of spread when spot prices are lower than the futures prices. Only in case of crude oil, positive NCY has higher volatility than negative NCY.

Keywords: Convenience yield, Asymmetric volatility, EGARCH, The theory of storage, Indian Commodity Futures Markets

DOI: 10.20472/EFC.2016.005.012

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