What Drives Daily Volatility in Lumber Futures Markets?
Most financial asset returns exhibit volatility persistence. This article investigates this phenomenon in the context of daily returns in lumber futures markets. The volatility of lumber futures is found to vary with different phases of the United States-Canada softwood lumber trade dispute. Daily price volatility was the highest in the post-Softwood Lumber Agreement period (2001‐2005), followed by the Softwood Lumber Agreement period (1996‐2000) and the period with trade disputes and temporary tariffs (1992‐1995). An inverse relationship between inventory levels and volatility is found. Further, the inventory effect on volatility varies across the different periods of the trade dispute. An inverse relation between time to delivery and volatility is also found. Moreover, it is shown that although volatility persistence exists in the lumber futures market, the time gap between the arrival of news to the markets and the delivery time of futures contracts is the fundamental variable in explaining volatility persistence.
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Document Type: Research Article
Publication date: 2011-10-01
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