A1635
Title: Volatility transmission between commodity option and futures markets
Authors: Marie-Helene Gagnon - Laval University (Canada)
Gabriel Power - Laval University (Canada) [presenting]
Constant Aka - Laval University (Canada)
Abstract: Derivatives markets are essential to price discovery in finance. The bidirectional volatility relationship is examined between options and futures markets from 11/2011 to 08/2022 for economically important commodities such as crude oil, natural gas, gold, wheat, corn and lean hogs in the USA (Chicago Mercantile Exchange). Information diffusion and risk spillovers are studied between these assets using random forest models, impulse response functions, and spillover measures, including the approach in a prior study. First, it is found that futures realized volatility immediately affects option volatility. Second, option volatility affects futures volatility less quickly but with a much longer-lasting impact. These results confirm the bidirectional relationship. The spillover analysis shows predominant self-driven volatility across most commodities, with notable net spillovers from options to futures. Finally, predictive analysis using random forests reveals that options markets generally lead futures markets in terms of providing useful information for predicting volatility. They provide significantly more accurate futures volatility predictions and allow for superior economic gains based on simple but feasible trading strategies presented.
