The Predictive Power of Macroeconomic Uncertainty for Commodity Futures Volatility
Zhuo Huang, Fang Liang, and Chen Tong
National School of Development, Peking University
We investigate whether and to what extent macroeconomic uncertainty predicts the volatilities of commodity futures. By examining 15 commodities in 5 categories, we find that the measure of aggregate macroeconomic uncertainty based on a large dataset has sizable predictive effects for commodity volatility. The predictive relationship holds both in-sample and out-of-sample after controlling for lagged volatility. However, the extent of predictability differs across commodities, with energy and metals futures exhibiting the most significant effects. For all commodities, the improvement in forecasting is more pronounced after 2005 and during recession periods.