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Which determinant is the most informative in forecasting crude oil market volatility: Fundamental, speculation, or uncertainty?

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  • Wei, Yu
  • Liu, Jing
  • Lai, Xiaodong
  • Hu, Yang

Abstract

This paper aims to identify the most informative determinant in forecasting crude oil market volatility. We use a new GARCH-class model based on mixed data sampling regression and the dynamic model averaging combination method to examine the predicting power of the determinants. We integrate both the global economic policy uncertainty (GEPU) indices and several national economic policy uncertainty (EPU) indices with traditional determinants, such as global oil demand, supply, and speculation. Our analysis suggests that the EPU indices comprehensively integrate the information contained in other determinants. Specifically, GEPU indices and the U.S.’s EPU index have superior predictive powers for West Texas Intermediate spot oil volatility. This finding highlights the importance of EPU indices, implying that they are key factors to consider when determining crude oil market volatility.

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  • Wei, Yu & Liu, Jing & Lai, Xiaodong & Hu, Yang, 2017. "Which determinant is the most informative in forecasting crude oil market volatility: Fundamental, speculation, or uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 141-150.
  • Handle: RePEc:eee:eneeco:v:68:y:2017:i:c:p:141-150
    DOI: 10.1016/j.eneco.2017.09.016
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    4. repec:eee:eneeco:v:75:y:2018:i:c:p:400-409 is not listed on IDEAS

    More about this item

    Keywords

    Crude oil market; Volatility forecasting; GARCH-MIDAS; Dynamic model averaging method;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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