Forecasting oil price volatility: Forecast combination versus shrinkage method

Yaojie Zhang, Yu Wei, Yi Zhang and Daxiang Jin

Energy Economics, 2019, vol. 80, issue C, 423-433

Abstract: In this paper, we compare the predictive ability between forecast combination and shrinkage method in the prediction of oil price volatility. Our investigation is based on the heterogeneous autoregressive (HAR) framework. Five combination approaches combine the individual forecasts generated by the HAR model and its various extensions, while two prevailing shrinkage methods, the elastic net and lasso, employ all the predictors in our HAR framework to generate the forecast of oil price volatility. The model confidence set (MCS) test shows that the elastic net and lasso have significantly better out-of-sample forecasting performance than not only the individual extended HAR models but also the combination approaches. This result is robust across a wide range of checks. In addition, we document that the elastic net and lasso also exhibit substantially higher directional accuracy. Furthermore, a mean-variance investor can realize sizeable economic gains by using the volatility forecasts based on the shrinkage methods to allocate her portfolio.

Keywords: Oil price volatility; HAR model; Forecast combination; Elastic net; Lasso (search for similar items in EconPapers)
JEL-codes: C53 C58 G11 G17 Q47 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (105)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988319300258
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:80:y:2019:i:c:p:423-433

DOI: 10.1016/j.eneco.2019.01.010

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().