The Economic Impact of Volatility Persistence on Energy Markets

Christina Nikitopoulos-Sklibosios (), Alice Thomas and Jianxin Wang
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Alice Thomas: Finance Discipline Group, UTS Business School, University of Technology Sydney, http://www.uts.edu.au/about/uts-business-school/finance

No 417, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This study examines the role of daily volatility persistence in determining future volatility in energy markets. In crude oil and natural gas markets, the impact of returns and variances is primarily transmitted to future volatility via the daily volatility persistence. Macro-economic factors, such as the VIX, the credit spread and the Baltic exchange dirty index, also impact future volatility, but this impact is again channeled via the volatility persistence. The dependence of volatility persistence on macro-economic conditions is termed conditional volatility persistence (CVP). The variation in daily CVP is economically significant, contributing up to 17% of future volatility and accounting for 25% of the model's explanatory power. Inclusion of the CVP in the model significantly improves volatility forecasts. Based on the utility benefits of volatility forecasts, the CVP adjusted volatility models provide up to 160 bps benefit to investors compared to the HAR models, even after accounting for transaction costs and varying trading speeds.

Keywords: Realized Volatility; Volatility Persistence; Energy Markets; HAR; Forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 C58 Q40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2020-12-01
New Economics Papers: this item is included in nep-cwa, nep-ene, nep-ets and nep-ore
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