Forecasting the Return Volatility of Energy Prices: A GARCH-MIDAS Approach

Afees Salisu and Raymond Swaray

Chapter 3 in Handbook of Energy Finance:Theories, Practices and Simulations, 2020, pp 47-71 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter offers an extension to the literature on energy prices by forecasting the return volatility of these prices using the GARCH-MIDAS approach. In addition to the realized volatility, it also evaluates the predictability of relevant macroeconomic information such as industrial growth and consumer prices (with and without energy components) in the predictive model for the return volatility of energy prices. The analyses are distinctly conducted for full sample, pre-GFC and post-GFC periods. On average, the findings support the inclusion of these macroeconomic information, particularly output growth and realized volatility, as they yield good in-sample and out-of-sample predictability results for the return volatility. However, the study finds contrasting evidence between the pre-GFC and post-GFC periods.

Keywords: Energy Finance; Financial and Economic Modeling; Volatility; Forecasting; Quantitative Finance; Energy Markets (search for similar items in EconPapers)
JEL-codes: G20 G32 Q40 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Forecasting the return volatility of energy prices: A GARCH MIDAS approach (2017)
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