Macroeconomic forecasts and commodity futures volatility

Abstract

We examine the impact of macroeconomic expectations on the volatility of Chinese commodity futures. As commodity futures are forward-looking, we expect them to be influenced by market expectations of the future economic situation, which we capture using a data set of professional macroeconomic forecasts. We analyze 15 commodity futures contracts using a GARCH-MIDAS model that contains daily price volatility and monthly macroeconomic forecasts. We find that the volatility of commodity futures is impacted more strongly by macroeconomic forecasts than by concurrent economic conditions. Furthermore, augmenting the volatility model with the macroeconomic forecasts improves the model ability to predict future volatility. These volatility predictions also offer economic gains to a mean-variance utility investor in a portfolio setting. Finally, the impact of macroeconomic forecasts is dependent on the state of the economy.