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Oil price volatility forecast with mixture memory GARCH

Author

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  • Klein, Tony
  • Walther, Thomas

Abstract

We expand the literature of volatility and Value-at-Risk forecasting of oil price returns by comparing the recently proposed Mixture Memory GARCH (MMGARCH) model to other discrete volatility models (GARCH, RiskMetrics, EGARCH, APARCH, FIGARCH, HYGARCH, and FIAPARCH). We incorporate an Expectation-Maximization algorithm for parameter estimation of the MMGARCH and find different structures in volatility level as well as shock persistence. MMGARCH is also able to cover asymmetric and long memory effects. Furthermore, a dissimilar memory structure in variance of WTI and Brent crude oil prices is observed which is supported by additional tests. Parameter estimation and comparison of the models reveal significant long memory and asymmetry in oil price returns. In regard of variance forecasting and Value-at-Risk prediction, it is shown that MMGARCH outperforms the aforementioned models due to its dynamic approach in varying the volatility level and memory of the process. We find MMGARCH superior for application in risk management as a result of its flexibility in adjusting to variance shifts and shocks.

Suggested Citation

  • Klein, Tony & Walther, Thomas, 2016. "Oil price volatility forecast with mixture memory GARCH," Energy Economics, Elsevier, vol. 58(C), pages 46-58.
  • Handle: RePEc:eee:eneeco:v:58:y:2016:i:c:p:46-58
    DOI: 10.1016/j.eneco.2016.06.004
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    More about this item

    Keywords

    GARCH-type models; Long memory; Asymmetry; Mixture memory; Oil price volatility; Value-at-Risk; Volatility structure;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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