The role of jumps in the agricultural futures market on forecasting stock market volatility: New evidence

Abstract

In this study, we explore the effect of cojumps within the agricultural futures market, and cojumps between the agricultural futures market and the stock market, on stock volatility forecasting. Also, we take into account large and small components of cojumps. We have several noteworthy findings. First, large jumps may lead to more substantial fluctuations and are more powerful than small jumps. The effect of cojumps and their decompositions on future volatility are mixed. Second, a model including large and small cojumps between the agricultural futures market and the stock market can achieve a higher forecasting accuracy, implying that large and small cojumps contain more useful predictive information than cojumps themselves. Third, our conclusions are robust based on various robustness tests such as the realized kernel, expanding forecasts, different forecasting windows, different jump tests, and different threshold values.

The Effect of Jumps in the Crude Oil Market on the Sovereign Risks of Major Oil Exporters

“…The overall results indicate evidence of infrequent rapid changes in the CDS spreads, which might suggest the need to account for such changes in any volatility modelling and risk measures. Not accounting for such infrequent rapid changes in the CDS spreads (i.e., jumps) can make the tails fatter, which in turn might magnify risk measures and affect options pricing (Clements and Liao 2017;Oliva and Renò 2018;Ma et al 2019).…”

“…Risks 2019, 7, 118 3 of 15 tails in their return distributions (e.g., Wilmot and Mason 2013), and the academic literature highlights the role of jumps in capturing the empirical properties of an asset and in modelling volatility dynamics (Eraker et al 2003;Driessen and Maenhout 2013). Recently, the empirical literature on the jump behaviour of assets has flourished, providing important implications for risk management, asset allocation and derivatives pricing (Oliva and Renò 2018;Ma et al 2019).…”

“…The presence of jumps in conventional assets such as equities, currencies, and commodities is well documented (Bollerslev et al 2008;Chevallier and Ielpo 2014;Gilder et al 2014;Ma et al 2019). However, the jump behaviour in sovereign CDS markets is extremely understudied, especially for oil-exporting economies.…”

“…This is useful to investors, given that jumps can affect the structure of losses and profits related to their positions in the sovereign CDS markets. In fact, several studies indicate the presence of jumps in the crude oil market (see, among others, Wilmot and Mason 2013;Charles and Darné 2017;Chevallier and Ielpo 2014), implying the importance of detecting jumps for the sake of risk and portfolio management (Clements and Liao 2017;Ma et al 2019). Such an analysis would also help policymakers in refining their policies regarding energy and public finance sustainability.…”

“…Our paper is related to the literature dealing with jumps in financial assets (Dungey and Hvozdyk 2012;Chevallier and Ielpo 2014;Gilder et al 2014;Ma et al 2019), including crude oil prices (Wilmot and Mason 2013;Charles and Darné 2017;Maslyuk-Escobedo et al 2017) and their volatility. However, our current paper differs in its focus on the understudied sovereign CDS markets of major oil-exporting countries that are dependent on oil exports, and in relating jumps in sovereign CDS spreads to the jump behaviour in crude oil prices and implied volatility.…”