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A Markov switching long memory model of crude oil price return volatility

Silvestro Di Sanzo

Energy Economics, 2018, vol. 74, issue C, 351-359

Abstract: I propose a time series model that simultaneously captures long memory and Markov switching dynamics to analyze and forecast oil price return volatility. I compare the fit and forecasting performance of the model to that of a range of linear and nonlinear GARCH models widely adopted in the literature. Complexity-penalized likelihood criteria show that the Markov switching long memory model improves the description of the data. The out-of-sample results at several time horizons show that the model produces superior forecasts over those obtained from the selected GARCH competitors. Results are obtained using Patton's robust loss functions and the Hansen's superior predictive ability test. I conclude that the proposed model provides a useful alternative to the usually employed GARCH models.

Keywords: Crude oil volatility; Long memory; Markov switching; GARCH modelling; Volatility forecast (search for similar items in EconPapers)
JEL-codes: Q47 C32 C52 (search for similar items in EconPapers)
Date: 2018
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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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