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Structural Change in the Crude Oil Price Dynamic: Theoretical Study and Practical Implications

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Listed:
  • Francisco Giron¨¦s
  • Fernando Guerra
  • Jorge Hern¨¢ndez
  • Javier Poblaci¨®n

Abstract

As many researchers know, the price of oil was affected by a structural change, which we analyzed. We obtained the result of the Chow test (determining the date when the structural break occurred). We observed that important data such as the variance or the VAR vary significantly depending on the period that the data are taken from, with huge implications in the financial world. If an investor wanted to create a portfolio, selecting an inadequate variance and VAR could lead to erroneous results. If an investor creates a portfolio composed of certain assets and assumes a volatility of 20%, and volatility is actually 30%, the actual results could vary materially from those expected. In this study, we observed that the variance is generally higher after the structural change in oil and for oil companies.

Suggested Citation

  • Francisco Giron¨¦s & Fernando Guerra & Jorge Hern¨¢ndez & Javier Poblaci¨®n, 2013. "Structural Change in the Crude Oil Price Dynamic: Theoretical Study and Practical Implications," Business and Economic Research, Macrothink Institute, vol. 3(1), pages 38-55, June.
    • Handle: RePEc:mth:ber888:v:3:y:2013:i:1:p:38-55
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    References listed on IDEAS

    as
    1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    2. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
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    More about this item

    Keywords

    Structural Change; Commodity Prices; Value-at-Risk; Causality;
    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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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