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Volatility in crude oil futures: A comparison of the predictive ability of GARCH and implied volatility models

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  • Agnolucci, Paolo

Abstract

The WTI future contract quoted at the NYMEX is the most actively traded instrument in the energy sector. This paper compares the predictive ability of two approaches which can be used to forecast volatility: GARCH-type models where forecasts are obtained after estimating time series models, and an implied volatility model where forecasts are obtained by inverting one of the models used to price options. Although the main scope of the research discussed here is to evaluate which model produces the best forecast of volatility for the WTI future contract, evaluated according to statistical and regression-based criteria, we also investigate whether volatility of the oil futures are affected by asymmetric effects, whether parameters of the GARCH models are influenced by the distribution of the errors and whether allowing for a time-varying long-run mean in the volatility produces any improvement on the forecast obtained from GARCH models.

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  • Agnolucci, Paolo, 2009. "Volatility in crude oil futures: A comparison of the predictive ability of GARCH and implied volatility models," Energy Economics, Elsevier, vol. 31(2), pages 316-321, March.
  • Handle: RePEc:eee:eneeco:v:31:y:2009:i:2:p:316-321
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