Analyzing and Forecasting Volatility Spillovers and Asymmetries in Major Crude Oil Spot, Forward and Futures Markets

Chia-Lin Chang (), Michael McAleer and Roengchai Tansuchat ()

No EI 2010-14, Econometric Institute Report from Erasmus University Rotterdam, Econometric Institute

Abstract: Crude oil price volatility has been analyzed extensively for organized spot, forward and futures markets for well over a decade, and is crucial for forecasting volatility and Value-at-Risk (VaR). There are four major benchmarks in the international oil market, namely West Texas Intermediate (USA), Brent (North Sea), Dubai/Oman (Middle East), and Tapis (Asia-Pacific), which are likely to be highly correlated. This paper analyses the volatility spillover and asymmetric effects across and within the four markets, using three multivariate GARCH models, namely the constant conditional correlation (CCC), vector ARMA-GARCH (VARMA-GARCH) and vector ARMA-asymmetric GARCH (VARMA-AGARCH) models. A rolling window approach is used to forecast the 1-day ahead conditional correlations. The paper presents evidence of volatility spillovers and asymmetric effects on the conditional variances for most pairs of series. In addition, the forecast conditional correlations between pairs of crude oil returns have both positive and negative trends. Moreover, the optimal hedge ratios and optimal portfolio weights of crude oil across different assets and market portfolios are evaluated in order to provide important policy implications for risk management in crude oil markets.

Keywords: crude oil prices; multivariate GARCH; volatility spillovers; forward returns; futures returns; spot returns; conditional correlation (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-for and nep-rmg
Date: 2010-03-02
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Related works:
Working Paper: Analyzing and Forecasting Volatility Spillovers and Asymmetries in Major Crude Oil Spot, Forward and Futures Markets (2010)
Working Paper: Analyzing and Forecasting Volatility Spillovers and Asymmetries in Major Crude Oil Spot, Forward and Futures Markets (2010)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:eureir:1765018329

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