Commodity markets may be creating 80% of its own volatility. Here's how.

Right.

Yes.

It's a great point to start, actually.

So we have traditionally we have thought of volatility as caused by external events to the market.

Say we have a tornado hitting grain fields or you have a war happening in the Middle East that disrupts the flow of commodities in the world.

Or you have changes in economic policy in China.

So China suddenly decides to buy less grains or less cattle or less meat from the rest of the world.

So a lot of different events, external events to the market.

Sometimes things like this happen and then they're going to impact price.

They're going to impact how prices change over time.

So traditionally, we have studied volatility in terms of how prices, how we can model those changes in prices once those external events happen, once those external events affect the market.

I was going to say some of those things, you know, it's even more than just black swan events, right? They could be, you know, predictable things like an election or like you said, a trade mission that went well or didn't go well.

It's more than just black swan events, right?

Yes, so you have those black swans, things that we never thought of before and suddenly they happen.

But we also have things like weather, the trade missions that you mentioned, things that we know they are going to happen at some point, but we don't know when they are going to happen and how strong the impact is going to be.

Now let's go to your thoughts.

So as you examine volatility and try and explain it, if you will, expand a little bit more.

What thought did you have? How did you want to examine volatility that was different than how it was looked at before?

So instead of just thinking of volatility caused by external events in the market in those weather, trade missions, wars that suddenly happen and then have an impact on the market, we thought that part of that volatility could also be explained by the internal dynamics, the internal mechanics of the market.

not by anything external, but rather by how buyers and sellers in a market behave relative to each other, for example.

So we're not saying that external events are not important.

No, that's not at all.

So those external events do play a role in volatility, but we could also have that internal dynamics in the market explaining part of the volatility.

So our idea then was to try to figure out how much of the volatility would be explained by those external events and how much of that could be caused internally by the dynamics of the market itself.

Now you said it was a very complicated question to ask it that way.