Geopolitical risk aligned and volatility forecasting in commodity markets
Thanos Verousis  1, *@  , Kai Wang, Zhiping Zhou@
1 : Vlerick Business School [Leuven]
* : Corresponding author

In this paper, we investigate the predictability of geopolitical risk on commodity price volatility based on a new commodity-aligned global geopolitical risk index. The new index captures the sensitivity of geopolitical risks to the realized volatility of a specific commodity, therefore discarding the geopolitical noise that is not relevant for that commodity. We show that the new index has strong in-sample and out-of-sample predictive power for forecasting the volatility of agriculture, livestock, energy, industrial and precious metals for horizons up to six months. The commodity-aligned geopolitical risk index outperforms the global geopolitical risk index. The results remain robust when controlling for macro and economic policy uncertainty, historical commodity market volatility, news-implied volatility, oil price shocks, financial stress and other macroeconomic variables which are closely related to the production process and the mechanics of commodity markets.


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