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Exploiting the heteroskedasticity in measurement error to improve volatility predictions in oil and biofuel feedstock markets

Emawtee Bissoondoyal-Bheenick, Robert Brooks, Hung Do and Russell Smyth ()

Energy Economics, 2020, vol. 86, issue C

Abstract: We examine whether heteroskedasticity in measurement errors improves the volatility forecasting ability of the Heterogenous Autoregressive (HAR) model in crude oil and biofuel feedstock markets. We also examine the incremental explanatory power of jumps and the investor fear gauge (IFG) over heteroskedasticity in measurement errors in improving the volatility forecasting ability of the HAR model in each of these markets. For the in-sample evaluation, we find that exploiting the heteroskedasticity of measurement errors in the HAR model improves the model's goodness of fit (measured by adjusted R2) by up to 10% depending on the market. IFG has a significant incremental role over heteroskedasticity in measurement errors in improving the fit of the HAR model in both the crude oil and biofuel feedstock markets, while jumps have a significant incremental role in improving the fit of the HAR model in the crude oil market, but not the biofuel feedstock markets. For the out-of-sample forecasts, including regime switching improves volatility predictions in the corn and wheat markets across all forecasting horizons, while for the soybean market, including regime switching improves the performance of multi-step volatility forecasts. In the out-of-sample forecasts the best ranked models almost always include heteroskedasticity of measurement error and IFG.

Keywords: Volatility forecasting; HAR; HARQ; Regime switching; Crude oil; Biofuel feedstock (search for similar items in EconPapers)
JEL-codes: C53 C58 G17 Q02 Q47 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:86:y:2020:i:c:s0140988320300281

DOI: 10.1016/j.eneco.2020.104689

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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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