Detecting and modeling changing volatility in the copper futures market

✍ Scribed by Bracker, Kevin; Smith, Kenneth L.

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 541 KB
• Volume: 19
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/(sici)1096-9934(199902)19:1<79::aid-fut4>3.0.co;2-k

✦ Synopsis

Copper futures returns are characterized by negative skewness and excess kurtosis. Research has not yet examined this nonnormality, which contributes to their volatility. To date little attention has been paid to the modeling of these series. Therefore, the purpose of this paper is to (i) detect alternating subperiods of volatility by using a method that uses an iterated cumulative sum of squares (ICSS) algorithm to identify breakpoints in the series; and (ii) compare the ability of five models (the random walk, GARCH, EGARCH, AGARCH, and the GJR model) to capture the volatility within each ICSS identified subperiod. These tests were applied to two copper futures series (open to close and close to close prices). Results indicate that the ranking (in terms of the root mean square error) is similar for both series. That is, the GARCH or EGARCH model rank first and second, depending on the series, followed by the GJR model. AGARCH and the random walk models perform poorly.