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Southern oscillation: Great value of its trends for forecasting crude oil spot price volatility

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  • Hong, Yanran
  • Yu, Jize
  • Su, Yuquan
  • Wang, Lu

Abstract

An increasing number of studies have verified the impact of climate change on commodity spot markets. Based on the forecasting framework, we revisit this work by focusing on the crude oil spot markets. We employ the Southern Oscillation Index (SOI) to capture the climate changes as it determines the weather and climate of numerous living areas. To obtain a more accurate result, we apply the STL decomposition to construct a series of the GARCH-MIDAS models combining the trend, seasonal, and remainder components of SOI. The empirical results reveal that the SOI trend show significance in the in-sample estimation and the model involving it outperforms others in the out-of-sample prediction. Hence, the trend of weather and climate changes may provide greater economic value for market participants investing crude oil spot markets.

Suggested Citation

  • Hong, Yanran & Yu, Jize & Su, Yuquan & Wang, Lu, 2023. "Southern oscillation: Great value of its trends for forecasting crude oil spot price volatility," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 358-368.
    • Handle: RePEc:eee:reveco:v:84:y:2023:i:c:p:358-368
    DOI: 10.1016/j.iref.2022.11.023
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    2. Li, Zepei & Huang, Haizhen, 2023. "Challenges for volatility forecasts of US fossil energy spot markets during the COVID-19 crisis," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 31-45.

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    More about this item

    Keywords

    Volatility forecasting; Southern oscillation; Crude oil spot market; STL decomposition; GARCH-MIDAS;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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