Economics at your fingertips  

Forecasting crude oil volatility with geopolitical risk: Do time-varying switching probabilities play a role?

Lu Wang, Feng Ma, Jianyang Hao and Xinxin Gao

International Review of Financial Analysis, 2021, vol. 76, issue C

Abstract: This study examines whether geopolitical risk (GPR) exhibits an ability to forecast crude oil volatility from a time-varying transitional dynamics perspective. Unlike previous studies that assume an oversimplification of the fixed transition probabilities for crude oil volatility, we develop an asymmetric time-varying transition probability Markov regime switching (AS-TVTP-MS) GARCH model. In-sample estimated results show that GPR yields strong evidence of regime switching behavior on crude oil volatility and that the negative shocks of GPR result in greater effects on switching probabilities than positive shocks. Out-of-sample results indicate that the AS-TVTP-MS GARCH model containing the GPR index outperforms other models, suggesting that the consideration of GPR information and time-varying regime switching together results in superior predictive performance. Moreover, the predictability of oil volatility is further verified to be economically significant in the framework of portfolio allocation. In addition, our results are robust to various settings.

Keywords: Crude oil market volatility; Geopolitical risk; Volatility forecasting; Markov-regime switching; Time-varying transition probabilities (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16) Track citations by RSS feed

Downloads: (external link)
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:

DOI: 10.1016/j.irfa.2021.101756

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2023-09-20
Handle: RePEc:eee:finana:v:76:y:2021:i:c:s1057521921000983