Asymmetric Volatility in Commodity Markets

The paper studies the return–volatility relationship in a range of commodities. We develop a commodity price model and show that the volatility of price changes can be positively or negatively related to demand shocks. An “inverse leverage effect”—the volatility is higher following positive price shocks—is found in more than half of the daily spot prices. The effect is weaker in the three-month futures market, the period after mid-2000s and monthly historical volatility measures. Only crude oil exhibits a “leverage effect”—higher volatility follows a negative shock—and the reason is explored in the context of its special market structure.