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The Role of Economic and Financial Uncertainties in Predicting Commodity Futures Returns and Volatility: Evidence from a Nonparametric Causality-in-Quantiles Test

Author

Listed:
  • Walid Bahloul

    (Governance, Finance and Accounting Laboratory, Faculty of Business and Economics, University of Sfax, Sfax, Tunisia)

  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey and Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Juncal Cunado

    (University of Navarra, School of Economics, Edificio Amigos, Pamplona, Spain.)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract
We analyze the ability of economic and financial uncertainties in predicting movements in commodity futures markets. Using daily data over the period of 8th May, 1992 to 31st August, 2016 on 21 commodity futures covering agriculture, energy, metals and livestock, we find that: (a) Linear predictive tests provide virtually no evidence of predictability; (b) Linear models are misspecified due to nonlinearity and hence, results from the framework cannot be relied upon, and; (c) Using a k-th order nonparametric causality-in-quantiles test, which is robust to misspecification in the presence of nonlinearities, we find evidence that measures of uncertainty can predict returns and/or volatility of as many as 20 of the commodities considered at least at one point of their respective conditional distributions for returns and variance. In general, we highlight the importance of modeling nonlinearity, higher order moments, and quantiles of returns and volatility when carrying out predictability analysis involving commodity futures and uncertainty.

Suggested Citation

  • Walid Bahloul & Mehmet Balcilar & Juncal Cunado & Rangan Gupta, 2017. "The Role of Economic and Financial Uncertainties in Predicting Commodity Futures Returns and Volatility: Evidence from a Nonparametric Causality-in-Quantiles Test," Working Papers 201725, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201725
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    More about this item

    Keywords

    Economic and Financial Uncertainty; Commodity Futures Markets; Returns; Volatility; Nonparametric Causality-in-Quantiles Test.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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