Macro factors and the realized volatility of commodities: A dynamic network analysis

Abstract

This paper explores the relationship between macro-factors and the realized volatility of commodity futures. Three main commodities—soybeans, gold and crude oil—are investigated using high-frequency data. For macro factors, we select six indicators including economic policy uncertainty (EPU), the economic surprise index (ESI), default spread (DEF), the investor sentiment index (SI), the volatility index (VIX), and the geopolitical risk index (GPR). These indicators represent three dimensions from macroeconomics and capital markets to a broader geopolitical dimension. Through establishing a dynamic connectedness network, we show how these macro factors contribute to the volatility fluctuations in commodity markets. The results demonstrate clearly distinctive features in the reaction to macro shocks across different commodities. Crude oil and gold, for example, are more reactive to market sentiment, whereas DEF contributes the most to the realized volatility of soybeans. Macroeconomic factors and geopolitical risks are more relevant to crude oil volatilities compare to the other two. Our empirical results also reveal the fact that the macro influence on the realized volatility of commodities is time varying.