IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Volatility Persistence in Crude Oil Markets

  • Amélie Charles

    (Audencia - Audencia)

  • Olivier Darné

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)

Financial market participants and policy-makers can benefit from a better understanding of how shocks can affect volatility over time. This study assesses the impact of structural changes and outliers on volatility persistence of three crude oil markets - Brent, West Texas Intermediate (WTI) and Organization of Petroleum Exporting Countries (OPEC) - between January 2, 1985 and June 17, 2010. Firstly, we identify the time points at which structural changes occurred using the modified ICSS test developed by Sansó et al. (2004) and then incorporate this information into the volatility modeling. Our results indicated that the degree of persistence of volatility is reduced by incorporating the variance changes into the volatility model. Secondly, we identify outliers using intervention analysis and conditional heteroscedasticity model. These large shocks can be associated with particular event patterns, such as the invasion of Kuwait by Iraq, the Operation Desert Storm, the Operation Desert Fox, and the Global Financial Crisis as well as OPEC announcements on production reduction or US announcements on crude inventories. We show that outliers can bias the estimation of the persistence of the volatility. Taking into account outliers on the volatility modelling process may improve the understanding of volatility in crude oil markets.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hal.archives-ouvertes.fr/docs/00/71/93/87/PDF/LEMNA_WP_201232.pdf
Download Restriction: no

Paper provided by HAL in its series Working Papers with number hal-00719387.

as
in new window

Length:
Date of creation: 19 Jul 2012
Date of revision:
Handle: RePEc:hal:wpaper:hal-00719387
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00719387
Contact details of provider: Web page: http://hal.archives-ouvertes.fr/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
  2. Jurgen Doornik & Marius Ooms, 2005. "Outlier Detection in GARCH Models," Economics Series Working Papers 2005-W24, University of Oxford, Department of Economics.
  3. James M. Poterba & Lawrence H. Summers, 1984. "The Persistence of Volatility and Stock Market Fluctuations," Working papers 353, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Kang, Sang Hoon & Cheong, Chongcheul & Yoon, Seong-Min, 2011. "Structural changes and volatility transmission in crude oil markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(23), pages 4317-4324.
  5. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  6. M. Angeles Carnero & Daniel Peña & Esther Ruiz, 2001. "Outliers And Conditional Autoregressive Heteroscedasticity In Time Series," Statistics and Econometrics Working Papers ws010704, Universidad Carlos III, Departamento de Estadística y Econometría.
  7. Marzo, Massimiliano & Zagaglia, Paolo, 2007. "Volatility forecasting for crude oil futures," Research Papers in Economics 2007:9, Stockholm University, Department of Economics.
  8. Amélie Charles, 2008. "Forecasting volatility with outliers in GARCH models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(7), pages 551-565.
  9. Elena Andreou & Eric Ghysels, 2001. "Detecting Mutiple Breaks in Financial Market Volatility Dynamics," CIRANO Working Papers 2001s-65, CIRANO.
  10. Shinichi Sakata & Halbert White, 1998. "High Breakdown Point Conditional Dispersion Estimation with Application to S&P 500 Daily Returns Volatility," Econometrica, Econometric Society, vol. 66(3), pages 529-568, May.
  11. Carnero, M. Angeles & Peña, Daniel & Ruiz, Esther, 2012. "Estimating GARCH volatility in the presence of outliers," Economics Letters, Elsevier, vol. 114(1), pages 86-90.
  12. Davidson, James, 2004. "Moment and Memory Properties of Linear Conditional Heteroscedasticity Models, and a New Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 22(1), pages 16-29, January.
  13. Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 395-422.
  14. Mohamed AROURI & Amine LAHIANI & D.-K. NGUYEN, 2010. "Forecasting the Conditional Volatility of Oil Spot andFutures Prices with Structural Breaksand Long Memory Models," Working Papers 661, Orleans Economic Laboratorys, University of Orleans.
  15. Demirer, RIza & Kutan, Ali M., 2010. "The behavior of crude oil spot and futures prices around OPEC and SPR announcements: An event study perspective," Energy Economics, Elsevier, vol. 32(6), pages 1467-1476, November.
  16. Asger Lunde & Peter Reinhard Hansen, 2001. "A Forecast Comparison of Volatility Models: Does Anything Beat a GARCH(1,1)?," Working Papers 2001-04, Brown University, Department of Economics.
  17. Thomas Mikosch & Cătălin Stărică, 2004. "Nonstationarities in Financial Time Series, the Long-Range Dependence, and the IGARCH Effects," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 378-390, February.
  18. Suzanne S. Lee & Per A. Mykland, 2008. "Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
  19. Ling, Shiqing & McAleer, Michael, 2002. "NECESSARY AND SUFFICIENT MOMENT CONDITIONS FOR THE GARCH(r,s) AND ASYMMETRIC POWER GARCH(r,s) MODELS," Econometric Theory, Cambridge University Press, vol. 18(03), pages 722-729, June.
  20. Torben G. Andersen & Tim Bollerslev & Dobrislav Dobrev, 2007. "No-Arbitrage Semi-Martingale Restrictions for Continuous-Time Volatility Models subject to Leverage Effects, Jumps and i.i.d. Noise: Theory and Testable Distributional Implications," NBER Working Papers 12963, National Bureau of Economic Research, Inc.
  21. Haldrup, Niels & Nielsen, Morten Orregaard, 2007. "Estimation of fractional integration in the presence of data noise," Computational Statistics & Data Analysis, Elsevier, vol. 51(6), pages 3100-3114, March.
  22. Bali, Rakesh & Guirguis, Hany, 2007. "Extreme observations and non-normality in ARCH and GARCH," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 332-346.
  23. Bradley T. Ewing & Farooq Malik, 2010. "Estimating Volatility Persistence in Oil Prices Under Structural Breaks," The Financial Review, Eastern Finance Association, vol. 45(4), pages 1011-1023, November.
  24. Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665 National Bureau of Economic Research, Inc.
  25. Nelson, Daniel B & Cao, Charles Q, 1992. "Inequality Constraints in the Univariate GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 229-35, April.
  26. M. Angeles Carnero & Daniel Peña & Esther Ruiz, 2007. "Effects of outliers on the identification and estimation of GARCH models," Journal of Time Series Analysis, Wiley Blackwell, vol. 28(4), pages 471-497, 07.
  27. Bollerslev, Tim & Ole Mikkelsen, Hans, 1996. "Modeling and pricing long memory in stock market volatility," Journal of Econometrics, Elsevier, vol. 73(1), pages 151-184, July.
  28. Fernandez, Viviana, 2006. "The impact of major global events on volatility shifts: Evidence from the Asian crisis and 9/11," Economic Systems, Elsevier, vol. 30(1), pages 79-97, March.
  29. Hou, Aijun & Suardi, Sandy, 2012. "A nonparametric GARCH model of crude oil price return volatility," Energy Economics, Elsevier, vol. 34(2), pages 618-626.
  30. Wei, Yu & Wang, Yudong & Huang, Dengshi, 2010. "Forecasting crude oil market volatility: Further evidence using GARCH-class models," Energy Economics, Elsevier, vol. 32(6), pages 1477-1484, November.
  31. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  32. Nelson, Daniel B., 1990. "Stationarity and Persistence in the GARCH(1,1) Model," Econometric Theory, Cambridge University Press, vol. 6(03), pages 318-334, September.
  33. Michael McKenzie, 1997. "ARCH modelling of Australian bilateral exchange rate data," Applied Financial Economics, Taylor & Francis Journals, vol. 7(2), pages 147-164.
  34. Christian Conrad & Berthold R. Haag, 2006. "Inequality Constraints in the Fractionally Integrated GARCH Model," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(3), pages 413-449.
  35. Hyndman, Kyle, 2008. "Disagreement in bargaining: An empirical analysis of OPEC," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 811-828, May.
  36. Giot, Pierre & Laurent, Sebastien, 2003. "Market risk in commodity markets: a VaR approach," Energy Economics, Elsevier, vol. 25(5), pages 435-457, September.
  37. van Dijk, D.J.C. & Franses, Ph.H.B.F. & Lucas, A., 1996. "Testing for ARCH in the Presence of Additive Outliers," Econometric Institute Research Papers EI 9659-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  38. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
  39. Pindyck, Robert S., 1998. "The long-run evolution of energy prices," Working papers WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  40. Adnan Kasman, 2009. "The impact of sudden changes on the persistence of volatility: evidence from the BRIC countries," Applied Economics Letters, Taylor & Francis Journals, vol. 16(7), pages 759-764.
  41. Heather Mitchell & Michael Mckenzie, 2003. "GARCH model selection criteria," Quantitative Finance, Taylor & Francis Journals, vol. 3(4), pages 262-284.
  42. Askari, Hossein & Krichene, Noureddine, 2008. "Oil price dynamics (2002-2006)," Energy Economics, Elsevier, vol. 30(5), pages 2134-2153, September.
  43. Jurgen A. Doornik & Marius Ooms, 2005. "Outlier Detection in GARCH Models," Tinbergen Institute Discussion Papers 05-092/4, Tinbergen Institute.
  44. Lin, Sharon Xiaowen & Tamvakis, Michael, 2010. "OPEC announcements and their effects on crude oil prices," Energy Policy, Elsevier, vol. 38(2), pages 1010-1016, February.
  45. Ng, Hock Guan & McAleer, Michael, 2004. "Recursive modelling of symmetric and asymmetric volatility in the presence of extreme observations," International Journal of Forecasting, Elsevier, vol. 20(1), pages 115-129.
  46. David Cabedo, J. & Moya, Ismael, 2003. "Estimating oil price 'Value at Risk' using the historical simulation approach," Energy Economics, Elsevier, vol. 25(3), pages 239-253, May.
  47. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, vol. 15(1), pages 1-9, February.
  48. Leila Nouira & Ibrahim Ahamada & Jamel Jouini & Alain Nurbel, 2004. "Long-memory and shifts in the unconditional variance in the exchange rate euro/US dollar returns," Applied Economics Letters, Taylor & Francis Journals, vol. 11(9), pages 591-594.
  49. Hillebrand, Eric, 2005. "Neglecting parameter changes in GARCH models," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 121-138.
  50. Nathan S. Balke & Thomas B. Fomby, 1991. "Large shocks, small shocks, and economic fluctuations: outliers in macroeconomic times series," Research Paper 9101, Federal Reserve Bank of Dallas.
  51. Vo, Minh T., 2009. "Regime-switching stochastic volatility: Evidence from the crude oil market," Energy Economics, Elsevier, vol. 31(5), pages 779-788, September.
  52. Salisu, Afees A. & Fasanya, Ismail O., 2013. "Modelling oil price volatility with structural breaks," Energy Policy, Elsevier, vol. 52(C), pages 554-562.
  53. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-30, August.
  54. Wai Mun Fong & Kim Hock See, 2003. "Basis variations and regime shifts in the oil futures market," The European Journal of Finance, Taylor & Francis Journals, vol. 9(5), pages 499-513.
  55. Charles, Amelie & Darne, Olivier, 2005. "Outliers and GARCH models in financial data," Economics Letters, Elsevier, vol. 86(3), pages 347-352, March.
  56. Shiqing Ling & Michael McAleer, 2001. "Stationarity and the Existence of Moments of a Family of GARCH Processes," ISER Discussion Paper 0535, Institute of Social and Economic Research, Osaka University.
  57. Fong, Wai Mun & See, Kim Hock, 2002. "A Markov switching model of the conditional volatility of crude oil futures prices," Energy Economics, Elsevier, vol. 24(1), pages 71-95, January.
  58. Larsson, Karl & Nossman, Marcus, 2011. "Jumps and stochastic volatility in oil prices: Time series evidence," Energy Economics, Elsevier, vol. 33(3), pages 504-514, May.
  59. Mohamed El Hedi Arouri & Duc Khuong Nguyen & Amine Lahiani, 2010. "Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models," Working Papers hal-00507831, HAL.
  60. Hammoudeh, Shawkat & Li, Huimin, 2008. "Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 47-63.
  61. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  62. Christian Conrad, 2007. "Non-negativity Conditions for the Hyperbolic GARCH Model," KOF Working papers 07-162, KOF Swiss Economic Institute, ETH Zurich.
  63. Laurent, Sebastien & Peters, Jean-Philippe, 2002. " G@RCH 2.2: An Ox Package for Estimating and Forecasting Various ARCH Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 447-85, July.
  64. Xibin Zhang & Maxwell L. King, 2005. "Influence Diagnostics in Generalized Autoregressive Conditional Heteroscedasticity Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 118-129, January.
  65. repec:cup:cbooks:9780521770415 is not listed on IDEAS
  66. Wang, Ping & Moore, Tomoe, 2009. "Sudden changes in volatility: The case of five central European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 33-46, February.
  67. Prof. Dr. Walter Krämer & Baudouin Tameze Azamo, . "Structural change and estimated persistence in the GARCH(1,1)-model," Working Papers 5, Business and Social Statistics Department, Technische Universität Dortmund, revised May 2006.
  68. Cheong, Chin Wen, 2009. "Modeling and forecasting crude oil markets using ARCH-type models," Energy Policy, Elsevier, vol. 37(6), pages 2346-2355, June.
  69. Paulo M.M. Rodrigues & Antonio Rubia, 2010. "The Effects of Additive Outliers and Measurement Errors when Testing for Structural Breaks in Variance," Working Papers w201011, Banco de Portugal, Economics and Research Department.
  70. Mohammadi, Hassan & Su, Lixian, 2010. "International evidence on crude oil price dynamics: Applications of ARIMA-GARCH models," Energy Economics, Elsevier, vol. 32(5), pages 1001-1008, September.
  71. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
  72. repec:cup:cbooks:9780521779654 is not listed on IDEAS
  73. Kang, Sang Hoon & Kang, Sang-Mok & Yoon, Seong-Min, 2009. "Forecasting volatility of crude oil markets," Energy Economics, Elsevier, vol. 31(1), pages 119-125, January.
  74. Boudt, Kris & Daníelsson, Jón & Laurent, Sébastien, 2013. "Robust forecasting of dynamic conditional correlation GARCH models," International Journal of Forecasting, Elsevier, vol. 29(2), pages 244-257.
  75. Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
  76. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00719387. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.