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Modeling and forecasting crude oil markets using ARCH-type models

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  • Cheong, Chin Wen

Abstract

This study investigates the time-varying volatility of two major crude oil markets, the West Texas Intermediate (WTI) and Europe Brent. A flexible autoregressive conditional heteroskedasticity (ARCH) model is used to take into account the stylized volatility facts such as clustering volatility, asymmetric news impact and long memory volatility among others. The empirical results indicate that the intensity of long-persistence volatility in the WTI is greater than in the Brent. It is also found that for the WTI, the appreciation and depreciation shocks of the WTI have similar impact on the resulting volatility. However, a leverage effect is found in Brent. Although both the estimation and diagnostic evaluations are in favor of an asymmetric long memory ARCH model, only the WTI models provide superior in the out-of-sample forecasts. On the other hand, from the empirical out-of-sample forecasts, it appears that the simplest parsimonious generalized ARCH provides the best forecasted evaluations for the Brent crude oil data.

Suggested Citation

  • Cheong, Chin Wen, 2009. "Modeling and forecasting crude oil markets using ARCH-type models," Energy Policy, Elsevier, vol. 37(6), pages 2346-2355, June.
  • Handle: RePEc:eee:enepol:v:37:y:2009:i:6:p:2346-2355
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