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The predictive power of oil price shocks on realized volatility of oil: A note

Riza Demirer (), Rangan Gupta (), Christian Pierdzioch and Syed Jawad Hussain Shahzad ()

Resources Policy, 2020, vol. 69, issue C

Abstract: This paper examines the predictive power of oil supply, demand and risk shocks over the realized volatility of intraday oil returns. Utilizing the heterogeneous autoregressive realized volatility (HAR-RV) framework, we show that all shock terms on their own, and particularly financial market driven risk shocks, significantly improve the forecasting performance of the benchmark HAR-RV model, both in- and out-of-sample. Incorporating all three shocks simultaneously in the HAR-RV model yields the largest forecasting gains compared to all other variants of the HAR-RV model, consistently at short-, medium-, and long forecasting horizons. The findings highlight the predictive information captured by disentangled oil price shocks in accurately forecasting oil market volatility, offering a valuable opening for investors and corporations to monitor oil market volatility using information on traded assets at high frequency.

Keywords: Oil price shocks; Risk shocks; Oil; Realized volatility; Forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 Q02 (search for similar items in EconPapers)
Date: 2020
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Working Paper: The Predictive Power of Oil Price Shocks on Realized Volatility of Oil: A Note (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:69:y:2020:i:c:s0301420720308874

DOI: 10.1016/j.resourpol.2020.101856

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