The Predictive Power of Oil Price Shocks on Realized Volatility of Oil: A Note

Riza Demirer, Rangan Gupta, Christian Pierdzioch and Syed Jawad Hussain Shahzad

No 202044, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examines the predictive power of oil supply, demand and risk shocks over the realized volatility of intraday oil returns. Utilizing the heterogeneous autoregressive realized volatility (HAR-RV) framework, we show that all shock terms on their own, and particularly financial market driven risk shocks, significantly improve the forecasting performance of the benchmark HAR-RV model, both in- and out-of-sample. Incorporating all three shocks simultaneously in the HAR-RV model yields the largest forecasting gains compared to all other variants of the HAR-RV model, consistently at short-, medium-, and long forecasting horizons. The findings highlight the predictive information captured by disentangled oil price shocks in accurately forecasting oil market volatility, offering a valuable opening for investors and corporations to monitor oil market volatility using information on traded assets at high frequency.

Keywords: Oil Price Shocks; Risk Shocks; Oil; Realized Volatility; Forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 Q02 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2020-05
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Citations: View citations in EconPapers (30)

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Journal Article: The predictive power of oil price shocks on realized volatility of oil: A note (2020)
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