REGIME-SWITCHED VOLATILITY OF BRENT CRUDE OIL FUTURES WITH MARKOV-SWITCHING ARCH MODEL

Tien-Yu Chiu and Shwu-Jane Shieh ()
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Tien-Yu Chiu: Department of International Business, College of Commerce, National Cheng-Chi University, Taipei, Taiwan
Shwu-Jane Shieh: Department of International Business, College of Commerce, National Cheng-Chi University, Taipei, Taiwan

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 02, 113-124

Abstract: This paper investigates the volatility process of the Brent crude oil futures markets using Markov-switching ARCH (SWARCH) model. The SWARCH model allows the conditional disturbances to change as time passes and even to switch in different regimes. The empirical evidence shows that the SWARCH (3,3) model performs the best goodness of fit and the best forecast performance among different fitting models. The estimation of smoothing probabilities of data under different regimes facilitates to capture the characteristics of the data, and the high-volatility regime is associated with some extraordinary events, such as the 1990's Persian Gulf War, the 1997's Asia Financial Crisis, and the 2001's 911 terrorist attack.

Keywords: Markov-switching ARCH; SWARCH; volatility; Brent crude oil (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1142/S021902490900521X

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