Predicting the volatility of major energy commodity prices: The dynamic persistence model

Jozef Baruník and Lukas Vacha

Energy Economics, 2024, vol. 140, issue C

Abstract: Time variation and persistence are crucial properties of volatility that are often studied separately in energy volatility forecasting models. Here, we propose a novel approach that allows shocks with heterogeneous persistence to vary smoothly over time, and thus model the two together. We argue that this is important because such dynamics arise naturally from the dynamic nature of shocks in energy commodities. We identify such dynamics from the data using localised regressions and build a model that significantly improves volatility forecasts. Such forecasting models, based on a rich persistence structure that varies smoothly over time, outperform state-of-the-art benchmark models and are particularly useful for forecasting over longer horizons.

Keywords: Persistence heterogeneity; Wold decomposition; Local stationarity; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: C14 C18 C22 C50 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Predicting the volatility of major energy commodity prices: the dynamic persistence model (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:140:y:2024:i:c:s014098832400690x

DOI: 10.1016/j.eneco.2024.107982

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