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Primary commodity and its derivatives: Volatility relationships and market efficiency

Ryu, Yul
http://rave.ohiolink.edu/etdc/view?acc_num=case1056738980

Abstract Details

1993, Doctor of Philosophy, Case Western Reserve University, Economics.
While there are numerous previous studies that have characterized volatility behavior, the majority have focused on the behavior of individual asset volatility, principally stock volatility, whereas the relationship between volatilities has been virtually ignored. This dissertation examines the relationship between volatilities, particularly volatilities of a primary commodity and its derivative commodities. This study finds that volatilities of a primary commodity (crude oil) and its derivative commodities (heating oil and unleaded gasoline) are significantly positively correlated. It also finds that the relationship between volatilities is quite stable: there is a strong tendency to restore the volatility relationship when the relationship is violated. The dissertation also examines the time-variations of volatilities of the energy commodities. The contemporaneous volatility relationship between a primary commodity and its derivative, together with other information variables such as lags of volatility changes, the basis change, and the interest rate volatility change, are used to predict volatility changes of each commodity. The hypothesis that volatility follows a random walk process is rejected. For heating oil and unleaded gasoline, the direction of the one-day ahead out-of-sample volatility changes is correctly pred icted in over 65% of the cases. These hit ratios are significantly higher than 50% which is the expected hit ratio when volatility changes are not predictable. Based on the seemingly powerful predictability of volatility changes, this dissertation examines the efficiency of the market for options on energy commodity futures. Results show that abnormal risk-adjusted profits after transaction costs are taken into account cannot be earned consistently by trading energy options on the basis of the one day ahead out-of-sample volatility change. While the volatility changes are precisely predicted in a statistical sense, the magnitude of the daily volatility changes are not large enough to allow abnormal profit opportunities when the relatively large bid-ask spreads are considered. These results indicate that the energy options market is allocationally efficient.
Peter Ritchken (Advisor)
129 p.
Economics, Finance
Primary commodity derivatives Volatility relationships market efficiency

Recommended Citations

Citations

  • Ryu, Y. (1993). Primary commodity and its derivatives: Volatility relationships and market efficiency [Doctoral dissertation, Case Western Reserve University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=case1056738980

    APA Style (7th edition)

  • Ryu, Yul. Primary commodity and its derivatives: Volatility relationships and market efficiency. 1993. Case Western Reserve University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=case1056738980.

    MLA Style (8th edition)

  • Ryu, Yul. "Primary commodity and its derivatives: Volatility relationships and market efficiency." Doctoral dissertation, Case Western Reserve University, 1993. http://rave.ohiolink.edu/etdc/view?acc_num=case1056738980

    Chicago Manual of Style (17th edition)

case1056738980
922
© 1993, all rights reserved.
This open access ETD is published by Case Western Reserve University School of Graduate Studies and OhioLINK.