On realized volatility of crude oil futures markets: Forecasting with exogenous predictors under structural breaks

Jiawen Luo, Qiang Ji, Tony Klein, Neda Todorova and Dayong Zhang

Energy Economics, 2020, vol. 89, issue C

Abstract: We introduce Infinite Hidden Markov (IHM) models to forecasting realized volatilities of crude oil futures markets with exogenous factors. With these IHM models, we lift the restriction of a pre-defined number of regimes and allow for an unknown number of different parameter regimes and breakpoints. We employ two types of infinite hidden Markov models to accommodate structural breaks incurred by policy changes, exogenous shocks, and other factors. We find that IHM-HAR models outperform all other non-switching variants. In regard to forecasting performance, IHM-HAR models with exogenous factors such as realized volatilities of competing futures markets and the S&P500 are superior model choices for short-term forecasts. For longer-term forecasts, the equity channel shows only little positive impact. Evidence of economic gains in portfolio construction based on IHM-HAR forecasts is provided.

Keywords: Crude oil; Forecasting; HAR models; Markov switching; Realized volatility (search for similar items in EconPapers)
JEL-codes: C24 E32 Q43 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988320301213
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:89:y:2020:i:c:s0140988320301213

DOI: 10.1016/j.eneco.2020.104781

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().