Forecasting the density of oil futures

Florian Ielpo and Benoît Sévi

No 2014-601, Working Papers from Department of Research, Ipag Business School

Abstract: Forecasting the density of returns is useful for many purposes in finance, such as risk manage- ment activities, portfolio choice or derivative security pricing. Existing methods to forecast the den- sity of returns either use prices of the asset of interest or option prices on this same asset. The latter method needs to convert the risk-neutral estimate of the density into a physical measure, which is computationally cumbersome. In this paper, we take the view of a practitioner who observes the implied volatility under the form of an index, namely the recent OVX, to forecast the density of oil futures returns for horizons going from 1 to 60 days. Using the recent methodology in Maheu and McCurdy (2011) to compute density predictions, we compare the performance of time series models using implied volatility and either daily or intra-daily futures prices. Our results indicate that models based on implied volatility deliver significantly better density forecasts at all horizons, which is in line with numerous studies delivering the same evidence for volatility point forecast.

Keywords: mplied volatility; OVX; realized volatility; density forecasting; HAR. (search for similar items in EconPapers)
JEL-codes: C15 C32 C53 G1 Q4 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-01-01
New Economics Papers: this item is included in nep-for
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Citations: View citations in EconPapers (6)

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