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Fundamentals and spot return volatility : an empirical study using SUR model with GLS estimation

Senapati, Debashis; Sannes, Tore
Master thesis
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URI
http://hdl.handle.net/11250/278923
Date
2014
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  • Master Thesis [4207]
Abstract
Our thesis investigates whether fundamental factors- inventory and demand condition- are the main determinant of spot return volatility for 31 commodities in the period 2009-2013. We have followed the theory of storage approach and used the adjusted-spread between futures and spot prices for commodities to represent these fundamental factors. We develop a structural model to test the empirical relevance of adjusted spread along with volatility of nominal interest rate and movements in market liquidity on spot return variance. We have used Seemingly Unrelated Regression (SUR) model for panel data with Generalised Least Square (GLS) estimation technique. The adjusted-spread is found to be statistically significant and has positive effect on the spot return variance across the panel data for all the commodities. Our results suggest fundamental factors have an overwhelmingly large impact on the spot return variance as compared to other explanatory variables in our regression. Our results are consistent with both theory of storage and the existing literature related to this topic

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