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Oil price volatility and macroeconomic fundamentals: A regime switching GARCH-MIDAS model

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  • Pan, Zhiyuan
  • Wang, Yudong
  • Wu, Chongfeng
  • Yin, Libo

Abstract

We introduce a regime switching GARCH-MIDAS model to investigate the relationships between oil price volatility and its macroeconomic fundamentals. Our model takes into account both effects of long-term macroeconomic factors and short-term structural breaks on oil volatility. The in-sample and out-of-sample results show that macroeconomic fundamentals can provide useful information regarding future oil volatility beyond the historical volatility. We also find the evidence that the structural breaks cause higher degree of GARCH-implied volatility persistence. Two-regime GARCH-MIDAS models can significantly beat their single-regime counterparts in forecasting oil volatility out-of-sample.

Suggested Citation

  • Pan, Zhiyuan & Wang, Yudong & Wu, Chongfeng & Yin, Libo, 2017. "Oil price volatility and macroeconomic fundamentals: A regime switching GARCH-MIDAS model," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 130-142.
    • Handle: RePEc:eee:empfin:v:43:y:2017:i:c:p:130-142
    DOI: 10.1016/j.jempfin.2017.06.005
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    More about this item

    Keywords

    Crude oil; Volatility; Regime switching; Mixed-frequency data sampling; Forecasting;
    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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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