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Forecasting the realized volatility of the oil futures market: A regime switching approach

Author

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  • Ma, Feng
  • Wahab, M.I.M.
  • Huang, Dengshi
  • Xu, Weiju

Abstract

Considering nonlinear and highly persistent dynamics of realized volatility, we introduce Markov regime switching models to the Heterogeneous Autoregressive model of the Realized Volatility (HAR-RV) models to forecast the realized volatility of the crude oil futures market. In-sample results demonstrate that the high volatility regime is short-lived. Out-of-sample results suggest that HAR-RV models with regime switching increase the forecasting ability significantly than those without regime switching. Moreover, these findings are robust for different actual volatility benchmarks, forecasting windows, and model settings.

Suggested Citation

  • Ma, Feng & Wahab, M.I.M. & Huang, Dengshi & Xu, Weiju, 2017. "Forecasting the realized volatility of the oil futures market: A regime switching approach," Energy Economics, Elsevier, vol. 67(C), pages 136-145.
    • Handle: RePEc:eee:eneeco:v:67:y:2017:i:c:p:136-145
    DOI: 10.1016/j.eneco.2017.08.004
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    More about this item

    Keywords

    Volatility forecasting; HAR-RV-type models; Regime switching approach; Forecasting evaluation;
    All these keywords.

    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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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