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Oil price volatility and macroeconomic fundamentals: A regime switching GARCH-MIDAS model

Zhiyuan Pan, Yudong Wang, Chongfeng Wu and Libo Yin ()

Journal of Empirical Finance, 2017, vol. 43, issue C, 130-142

Abstract: We introduce a regime switching GARCH-MIDAS model to investigate the relationships between oil price volatility and its macroeconomic fundamentals. Our model takes into account both effects of long-term macroeconomic factors and short-term structural breaks on oil volatility. The in-sample and out-of-sample results show that macroeconomic fundamentals can provide useful information regarding future oil volatility beyond the historical volatility. We also find the evidence that the structural breaks cause higher degree of GARCH-implied volatility persistence. Two-regime GARCH-MIDAS models can significantly beat their single-regime counterparts in forecasting oil volatility out-of-sample.

Keywords: Crude oil; Volatility; Regime switching; Mixed-frequency data sampling; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C58 E32 Q41 Q47 (search for similar items in EconPapers)
Date: 2017
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:43:y:2017:i:c:p:130-142