The course of realized volatility in the LME non-ferrous metal market

Abstract

This study analyzes the volatility of LME futures contracts on aluminum, copper, lead, nickel and zinc using high-frequency data. The dynamics of realized volatility is studied over the period from January 2004 to September 2012 and is shown to be well captured with a rolling HAR-GARCH model. An increasing importance of short-term volatility components is evident across all metals in the aftermath of the global financial crisis and the related sharp decline in industrial metal prices. The heavier impact of short-term volatility corresponds consistently to a decreasing persistence of the volatility of realized volatility. In terms of predictive accuracy, even though leverage effects or GARCH-terms related to the volatility of realized volatility are characterized for the most part by significant in-sample parameters, the plain HAR model cannot be consistently outperformed by explicitly accounting for these stylized facts.