Risk aversion is considered as an important factor in predicting asset prices. Many studies have proved that there exists important price information spillover among crude oil, precious metals and agricultural markets. Then there naturally follows the question: Is the risk aversion of investors in crude oil market predictable for the returns of precious metals and agricultural products? The purpose of this paper is to answer this question. For this reason, the authors explore the directional predictability and the cross-quantile dependence between risk aversion of crude oil market investors and returns of precious metals and agricultural products.
To better describe the risk aversion of investors, this paper uses high-frequency data and model-free calculation method to obtain variance risk premium of crude oil. Then, this paper uses the cross-quantilogram method to investigate the directional predictability and cross-quantile dependence between risk aversion of crude oil market investors and returns of precious metals and agricultural products. Meanwhile, it employs the partial cross-quantilogram (PCQ) method to test the impact of control variables on the empirical results.
Firstly, risk aversion of crude oil market investors has directional predictability for returns of precious metals and agricultural products. Secondly, different degrees of risk aversion of crude oil market investors have different impacts on returns of precious metals and agricultural products. A low (high) degree of crude oil market investors' risk aversion has negative (positive) predictability for returns of precious metals and agricultural products. Finally, during the sample period, the returns of precious metals are more affected by risk aversion of crude oil market investors than returns of agricultural products.
First of all, this paper studies the impact of risk aversion of crude oil market investors on returns of precious metals and agricultural products. It updates previous relevant studies on the factors influencing the prices of precious metals and agricultural products, and provides a new idea for the forecast of those commodity returns. Secondly, this paper provides the evidence that different degrees of risk aversion of investors have different effects on the returns of commodities, and expands the research on the topic of commodity returns prediction. Finally, high-frequency data are employed in this paper to better capture the risk aversion of investors than commonly used daily data.
The authors are grateful for the financial support from National Natural Science Foundation of China (no. 71774051), Changjiang Scholars Program of the Ministry of Education of China (no. Q2016154), National Program for Support of Top-notch Young Professionals (no. W02070325), Science and Technology Innovation Program of Hunan Province (no. 2020RC4016) and Hunan Youth Talent Program. They also would like to thank the participants in the 9th National Conference on China Energy Economics and Management in Changsha, China, the 10th International Conference on Applied Energy in Hong Kong, China, and the 6th Conference on Energy and Climate Economics in Urumqi, China, as well as the seminar participants at Center for Resource and Environmental Management, Hunan University, for insightful comments.
Zhang, Y.-J. and Pan, X. (2021), "Does the risk aversion of crude oil market investors have directional predictability for the precious metal and agricultural markets?", China Agricultural Economic Review, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CAER-05-2020-0099
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