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Modelling the volatility of TOCOM energy futures: A regime switching realised volatility approach

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  • Alizadeh, Amir H.
  • Huang, Chih-Yueh
  • Marsh, Ian W.

Abstract

This paper combines the Heterogeneous Autoregressive Realised Volatility (HAR-RV) model and the Markov Regime Switching (MRS) approach to estimate and forecast volatility of energy futures contracts traded at the Tokyo Commodity Exchange (TOCOM). The proposed MRS-HAR-RV model allows the dynamics of the realised volatility to change as market conditions change. The dataset consists of intraday prices for gasoline, kerosene and crude oil futures. Estimation results suggest that MRS-HAR-RV model can capture dynamics of price volatility of energy futures better than alternative models. However, out-of-sample forecast evaluation results show that MRS-HAR-RV can only produce better forecasts for more liquid contracts. Moreover, MRS-HAR-RV model seems to less over-predict and more under-predict the volatility compared to HAR-RV, HAR-RV-CJ, GARCH, and MRS-GARCH models.

Suggested Citation

  • Alizadeh, Amir H. & Huang, Chih-Yueh & Marsh, Ian W., 2021. "Modelling the volatility of TOCOM energy futures: A regime switching realised volatility approach," Energy Economics, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:eneeco:v:93:y:2021:i:c:s0140988319302063
    DOI: 10.1016/j.eneco.2019.06.019
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    Cited by:

    1. Donghua Wang & Tianhui Fang, 2022. "Forecasting Crude Oil Prices with a WT-FNN Model," Energies, MDPI, vol. 15(6), pages 1-21, March.
    2. Chen, Louisa & Verousis, Thanos & Wang, Kai & Zhou, Zhiping, 2023. "Financial stress and commodity price volatility," Energy Economics, Elsevier, vol. 125(C).
    3. Qianjie Geng & Xianfeng Hao & Yudong Wang, 2024. "Forecasting the volatility of crude oil futures: A time‐dependent weighted least squares with regularization constraint," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(2), pages 309-325, March.

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    More about this item

    Keywords

    Regime-switch; TOCOM; Realised volatility; Petroleum futures;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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