Commodity Price Crash Risk and Crash Risk Contagion

ABSTRACT In this study, we propose measures for the risk of commodity price crash. Building on the recent phenomenon of financialization of commodities, we advocate the use of down‐to‐up volatility (DUVOL) and a negative coefficient of skewness (NCSKEW) using 1‐min and daily data, respectively. We find that the crash risk is the highest for natural gas, sugar, and coffee and remains low to moderate for most precious metals. Subsequently, we explore the commodity‐specific drivers of crash risk upon controlling for macro‐economic variations. We find that speculation and hedging pressure exacerbate the crash risk of most commodities, whereas basis risk alleviates the crash risk of commodities. We document that crash risk is priced in the cross‐section of commodity returns. We also find that the crash risk spillovers are asymmetric, remaining low at 33% at the median and peaking at approximately 88% during the extremities.