Ambiguity about volatility in the commodity futures market

This study offers the first comprehensive evidence of the impact of ambiguity about volatility on commodity futures. We demonstrate that ambiguity about volatility is a significant determinant of commodity futures returns and volatility. Building on Bianchi et al. (2018), we argue that ambiguity is a priced factor that is distinct from risk but moves with risk. In line with this argument, we show that volatility provides an amplification mechanism for ambiguity volatility shocks. Economically, this amplification effect is very important: the impact of an ambiguity volatility shock to commodity futures returns (volatility) during a less volatile period is 6 (1.8) times smaller than that when markets are least stable. We also document evidence of a heterogeneous influence of ambiguity about volatility on commodity asset classes. Economically, during stress periods, the impact of ambiguity on energy returns is approximately 200% larger than that of the commodity index. Our results survive a range of robustness tests.