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Volatility Persistence in Crude Oil Markets

Amelie Charles and Olivier Darné

Working Papers from HAL

Abstract: Financial market participants and policy-makers can benefit from a better understanding of how shocks can affect volatility over time. This study assesses the impact of structural changes and outliers on volatility persistence of three crude oil markets - Brent, West Texas Intermediate (WTI) and Organization of Petroleum Exporting Countries (OPEC) - between January 2, 1985 and June 17, 2010. Firstly, we identify the time points at which structural changes occurred using the modified ICSS test developed by Sansó et al. (2004) and then incorporate this information into the volatility modeling. Our results indicated that the degree of persistence of volatility is reduced by incorporating the variance changes into the volatility model. Secondly, we identify outliers using intervention analysis and conditional heteroscedasticity model. These large shocks can be associated with particular event patterns, such as the invasion of Kuwait by Iraq, the Operation Desert Storm, the Operation Desert Fox, and the Global Financial Crisis as well as OPEC announcements on production reduction or US announcements on crude inventories. We show that outliers can bias the estimation of the persistence of the volatility. Taking into account outliers on the volatility modelling process may improve the understanding of volatility in crude oil markets.

Keywords: Crude oil; volatility persistence; structural breaks; outliers; GARCH (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene
Date: 2012-07-19
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00719387
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Journal Article: Volatility persistence in crude oil markets (2014) Downloads
Working Paper: Volatility persistence in crude oil markets (2014) Downloads
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