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Forecasting energy market volatility using GARCH models: Can multivariate models beat univariate models?

Yudong Wang and Chongfeng Wu

Energy Economics, 2012, vol. 34, issue 6, 2167-2181

Abstract: In this paper, we forecast energy market volatility using both univariate and multivariate GARCH-class models. First, we forecast volatilities of individual assets and find that multivariate models display better performance than univariate models. Second, we forecast crack spread volatility and contrast the performance of multivariate models for two underlyings, with the alternative of univariate ones for crack spreads directly. Our evidence shows that univariate models allowing for asymmetric effects display the greatest accuracy. We also discuss the hedging strategy based on multivariate models and its implications for market participants.

Keywords: Energy markets; Volatility; Univariate GARCH; Multivariate GARCH; Crack spread (search for similar items in EconPapers)
JEL-codes: Q40 E30 C32 C52 (search for similar items in EconPapers)
Date: 2012
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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