Quant Ideas: market-making, risk and information in commodities

High volatility and noisy data sets have profound implications on risk management in commodity markets

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It is well-known that commodity assets and markets exhibit extreme volatilities. This is often dismissed as an interesting peculiarity that would mean we only need to put some bigger numbers into formulas we imported wholesale from the traditional financial markets.

This misguided confidence in the effectiveness of standard financial tools has led many a bank and trading operation into a whirlwind of sudden gains and equally unexpected massive losses. As the old adage in the business has it: it