Commodities Inventory Effect

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Executive Summary

Asymmetric GARCH models were developed for equity stocks to take into account the larger response of the conditional variance to negative price shocks. The authors show that these asymmetric GARCH models are also relevant for modeling commodity prices. Contrary to the equity case, positive shocks are the main contributors to the conditional variance of commodity prices. The theory of storage, by relating the state of the inventories of a commodity to its conditional variance, is a serious candidate to explain the phenomenon, as positive price shocks for commodities usually serve as proxies for the deterioration of the inventories.

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