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Jump dynamics with structural breaks for crude oil prices

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  • Lee, Yen-Hsien
  • Hu, Hsu-Ning
  • Chiou, Jer-Shiou
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    Abstract

    Abstract This study investigates the joint phenomena of permanent and transitory components in conditional variance and jump intensity along with verification of structural breaks for crude oil prices. We adopt a Component-ARJI model with structural break analysis, utilizing daily data on West Texas Intermediate crude oil spot and futures contracts. The analytical results verify the existence of permanent and transitory components in conditional variance, with the permanent component of conditional variance increasing with the occurrence of a sudden major event (such as the Iraqi Invasion of Kuwait, Operation Desert Storm and the war between the US and Iraq), and a relatively greater increase in the transitory component over the same period. Notably, jump intensity fluctuates with an increase in the transitory component of conditional variance in response to abnormal events. It is the transitory component which serves as the primary influential factor for jumps in returns; therefore, speculators are willing to take large risks, particularly with respect to anticipating future price movements, or gambling, in the hopes of rapidly making substantial gains; thus, speculators prefer the temporary volatility component and engage in trade activities. However, investors prefer the permanent volatility component, because they may well be better off relocating their assets into more stable portfolios to outperform the market portfolio over the long run.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 2 (March)
    Pages: 343-350

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:2:p:343-350

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Permanent and transitory components Jump intensity Component-ARJI model with structural breaks;

    References

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    Citations

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    Cited by:
    1. Chevallier, Julien, 2011. "Detecting instability in the volatility of carbon prices," Economics Papers from University Paris Dauphine 123456789/5110, Paris Dauphine University.
    2. Marc Gronwald, 2011. "A Characterization of Oil Price Behavior - Evidence from Jump Models," CESifo Working Paper Series 3644, CESifo Group Munich.
    3. Alvarez-Ramirez, Jose & Alvarez, Jesus & Solis, Ricardo, 2010. "Crude oil market efficiency and modeling: Insights from the multiscaling autocorrelation pattern," Energy Economics, Elsevier, vol. 32(5), pages 993-1000, September.
    4. Gronwald, Marc, 2012. "A characterization of oil price behavior — Evidence from jump models," Energy Economics, Elsevier, vol. 34(5), pages 1310-1317.
    5. Liu, Li & Wan, Jieqiu, 2011. "A study of correlations between crude oil spot and futures markets: A rolling sample test," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(21), pages 3754-3766.
    6. Arouri, Mohamed El Hédi & Lahiani, Amine & Lévy, Aldo & Nguyen, Duc Khuong, 2012. "Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models," Energy Economics, Elsevier, vol. 34(1), pages 283-293.
    7. Charles F. Mason & Neil Wilmot, 2014. "Jump Processes in Natural Gas Markets," CESifo Working Paper Series 4604, CESifo Group Munich.
    8. Martina, Esteban & Rodriguez, Eduardo & Escarela-Perez, Rafael & Alvarez-Ramirez, Jose, 2011. "Multiscale entropy analysis of crude oil price dynamics," Energy Economics, Elsevier, vol. 33(5), pages 936-947, September.
    9. Marc Gronwald & Janina Ketterer, 2012. "What Moves the European Carbon Market? - Insights from Conditional Jump Models," CESifo Working Paper Series 3795, CESifo Group Munich.
    10. Chang, Kuang-Liang, 2012. "The time-varying and asymmetric dependence between crude oil spot and futures markets: Evidence from the Mixture copula-based ARJI–GARCH model," Economic Modelling, Elsevier, vol. 29(6), pages 2298-2309.
    11. Wang, Yudong & Wei, Yu & Wu, Chongfeng, 2010. "Auto-correlated behavior of WTI crude oil volatilities: A multiscale perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(24), pages 5759-5768.

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