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Time-Varying Rare Disaster Risks, Oil Returns and Volatility

Author

Listed:
  • Rıza Demirer

    (Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, USA)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Tahir Suleman

    (School of Economics and Finance, Victoria University of Wellington, New Zealand and School of Business, Wellington Institute of Technology, New Zealand)

  • Mark E. Wohar

    (College of Business Administration, University of Nebraska at Omaha, Omaha, USA; School of Business and Economics, Loughborough University, Leicestershire, UK)

Abstract

This paper provides a novel perspective to the predictive ability of rare disaster risks for West Texas Intermediate (WTI) oil market returns and volatility using a nonparametric quantile-based methodology over the monthly period of 1918:01-2013:12. We show that a nonlinear relationship and structural breaks exists between oil returns and various rare disaster risks; hence, linear Granger causality tests are misspecified and the linear model results of non-predictability are unreliable. However, the quantile-causality test shows that rare disaster-risks strongly affect both WTI returns and volatility, with stronger evidence of predictability observed at lower quantiles of the respective conditional distributions. Our results are robust to alternative specification of volatility (based on a GARCH model), and measure of rare disaster risks (based on the number of crises).

Suggested Citation

  • Rıza Demirer & Rangan Gupta & Tahir Suleman & Mark E. Wohar, 2017. "Time-Varying Rare Disaster Risks, Oil Returns and Volatility," Working Papers 201762, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201762
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    More about this item

    Keywords

    Oil Returns and Volatility; Rare Disasters; Nonparametric Quantile Causality;
    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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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