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The role of global economic policy uncertainty in predicting crude oil futures volatility: Evidence from a two-factor GARCH-MIDAS model

Peng-Fei Dai, Xiong Xiong and Wei-Xing Zhou
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Peng-Fei Dai: TJU
Xiong Xiong: TJU
Wei-Xing Zhou: ECUST

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Abstract: This paper aims to examine whether the global economic policy uncertainty (GEPU) and uncertainty changes have different impacts on crude oil futures volatility. We establish single-factor and two-factor models under the GARCH-MIDAS framework to investigate the predictive power of GEPU and GEPU changes excluding and including realized volatility. The findings show that the models with rolling-window specification perform better than those with fixed-span specification. For single-factor models, the GEPU index and its changes, as well as realized volatility, are consistent effective factors in predicting the volatility of crude oil futures. Specially, GEPU changes have stronger predictive power than the GEPU index. For two-factor models, GEPU is not an effective forecast factor for the volatility of WTI crude oil futures or Brent crude oil futures. The two-factor model with GEPU changes contains more information and exhibits stronger forecasting ability for crude oil futures market volatility than the single-factor models. The GEPU changes are indeed the main source of long-term volatility of the crude oil futures.

Date: 2020-07
New Economics Papers: this item is included in nep-ene, nep-ets and nep-for
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Handle: RePEc:arx:papers:2007.12838