The Prediction Of Inferrous Metal Price Volatility To Stock Market

Abstract:With the financialization of commodity markets,the co-movements of nonferrous metal commodity prices with traditional capital markets has gradually increased. The price fluctuation of nonferrous metal has enlarged, thus increases its influence on the stock market, and nonferrous metal commodity price volatility begins to be regarded as part of the systematic risk source.The aim of this paper is to examine whether the price volatility of nonferrous metal(copper and aluminum) futures can be used to predict the excess stock market returns in China from the view of "trade-off between risk and return"The whole sample period is divided into two sub-period,the year from1995to2003and the year from2004to2011, according to the the price volatility of copper and aluminum and the degree of their financialization.Empirical results show that the price volatilities of copper and aluminum can not predict the excess stock market return both in-sample and out-of-sample in the period befor financialization (from1995to2003).But the price volatilities of copper and aluminum become a good predictor of excess stock market return both in-sample and out-of-sample after the financialization.(from2004to2011). The predictive ability of metal copper volatility is greater than that of aluminum.The predictive power of copper and aluminum remains statistically significant after controlling for several well-known stock market return predictors,such as the previous excess stock market return,the volatility of stock market return, the market Dividend yield,the inflation,the growth rate of money supply.This paper further examines whether the price volatility of copper and aluminum can predict the industry portfolio returns. Empirical results show that the price volatility of copper and aluminum can predict all of the13industry portfolio return at various horizons.After dividing the out-of-sample prediction, we find that the prediction mechanism is through the prediction of the stock market systematic risks.This paper expands the predictor to china’s stock return, and also set up a newly pattern of using commodity price volatility to predict stock return from the view of "trade-off between risk and return".