Time-Varying Rare Disaster Risks, Oil Returns and Volatility

Riza Demirer, Rangan Gupta, Tahir Suleman () and Mark Wohar ()

No 201762, Working Papers from University of Pretoria, Department of Economics

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).

Keywords: Oil Returns and Volatility; Rare Disasters; Nonparametric Quantile Causality (search for similar items in EconPapers)
JEL-codes: C22 C58 G14 G15 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2017-08
New Economics Papers: this item is included in nep-ene, nep-ore and nep-rmg
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Journal Article: Time-varying rare disaster risks, oil returns and volatility (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201762

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