What should be taken into consideration when forecasting oil implied volatility index?

Panagiotis Delis, Stavros Degiannakis and Kostantinos Giannopoulos

MPRA Paper from University Library of Munich, Germany

Abstract: Crude oil is considered a key commodity in all the economies around the world. This study forecasts the oil volatility index (OVX), which is the market’s expectation of future oil volatility, by incorporating information from other asset classes. The literature does not extensively test the long memory of the targeted volatility. Thus, we estimate the Hurst exponent implementing a rolling window rescaled analysis. We provide evidence for a strong long memory in the implied volatility (IV) indices which justifies the use of the HAR model in obtaining multiple days ahead OVX forecasts. We also define a dynamic model averaging (DMA) structure in the HAR model in order to allow for IV indices from other asset classes to be applicable at different time periods. The implementation of the DMA-HAR models informs forecasters to focus on the major stock market IV indices, and more specifically on the DJIA Volatility Index. Our results lead us to the conclusion that accurate OVX forecasts are obtained for short- and mid-run forecasting horizons. The evaluation framework is not limited to statistical loss functions but also embodies an options straddle trading strategy.

Keywords: crude oil; implied volatility; HAR modelling; trading strategies; dynamic model averaging; long memory (search for similar items in EconPapers)
JEL-codes: C58 G17 Q47 (search for similar items in EconPapers)
Date: 2021-11-26
New Economics Papers: this item is included in nep-ene, nep-for and nep-rmg
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Related works:
Journal Article: What Should be Taken into Consideration when Forecasting Oil Implied Volatility Index? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110831

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