An empirical analysis of the volume-volatility nexus in crude oil markets under structural breaks: Implications for forecasting

Saswat Patra

International Review of Economics & Finance, 2024, vol. 94, issue C

Abstract: The present study investigates how volume impacts volatility in crude oil markets, focusing on the Mixture of Distribution Hypothesis (MDH). Our results reveal a positive and significant volatility-volume association in the case of WTI spot markets. However, we cannot draw similar conclusions for Brent crude oil. Furthermore, we find that the presence of volume leads to only a negligible drop in the volatility persistence, thereby rejecting the claims of the MDH. By incorporating volume as a predictor for volatility and modelling the innovations using heavy-tailed distributions, our estimates of volatility for both Brent and WTI crude oil improve significantly. Our findings reveal that volume contains important information that can impact volatility and prices for crude oil. This has significant implications for market participants, institutional investors, as well as regulators as they can design better strategies and policies based on the volume of trade. Also, from the perspective of risk management and hedging, the results provide interesting insights. Our findings are consistent across different time periods, forecasting horizons and robust to alternative methodologies.

Keywords: Volume; Volatility persistence; Crude oil; Mixture of distribution hypothesis (search for similar items in EconPapers)
JEL-codes: C53 C58 G17 Q43 Q47 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:94:y:2024:i:c:s105905602400426x

DOI: 10.1016/j.iref.2024.103434

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