Modeling Volatility and Persistent Shocks in Metal Prices: A Markov Regime-Switching DGARCH Approach Applied to the London Metal Exchange

Abstract

This study focuses on the volatility of major base metals traded on the London Metal Exchange, using a DGARCH model with Markov regime switching. The objective was to better understand price dynamics and identify the phases of stability and turbulence specific to each market. The methodology relies on the analysis of daily logarithmic returns for aluminum, copper, lead, nickel, tin, and zinc, based on long historical series from Investing.com. The results show that aluminum and copper alternate between moderate and high volatility regimes, reflecting their strong sensitivity to global industrial cycles. Lead appears structurally more stable, dominated by a low-volatility regime, while tin is characterized by chronic instability with frequent regime shifts. Nickel and zinc, however, display convergence issues, suggesting more complex price dynamics, strongly linked to speculation and structural changes such as the energy transition.