Abstract:

This decade has seen movements in agricultural commodity futures markets never seen before. There are many factors that have intensified price movements and volatility behavior. Whatever the reasons are for price movements, it is clear that the volatility behavior in commodity markets constantly change, and risk managers need updated understanding to mitigate price risk. This study identified market structural breaks of weekly realized volatility in corn, wheat, soybeans, live cattle, feeder cattle and lean hogs futures markets. Furthermore, this study analyzed the forecasting performance of implied volatility, historical volatility, a composite approach and a naïve approach as pragmatic forecasters of realized volatility. Results indicate there are multiple market structural breaks present in all six commodities. Differences in the forecasting performance of the analyzed methods were examined when individual market regimes were analyzed. Implied volatility encompasses all the information contained in the historical volatility and the naïve measure across each identified market regime in all six commodities. Overall there is evidence that indicates superiority of implied volatility over historical volatility, composite and naïve approaches. Combined this suggest implied volatility is a sound forecast for 1-week ahead volatility in agricultural commodity markets.