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The nexus between the oil price and its volatility in a stochastic volatility in mean model with time-varying parameters

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University)

  • Zeynel Abidin Ozdemir

    (Gazi University, Ankara, Turkey)

Abstract

This study investigates the dynamic nexus between oil price and its volatility for oil spot and futures markets by means of stochastic volatility in mean model with time-varying parameters in the conditional mean. The study finds substantial time-variation about the impact of oil price volatility on oil price return in both spot and 1-month to 10-month futures markets. The oil price return volatility has positive impact on oil price return series over the sample period form the mid-1980s to 2017s except for four very short time periods, which correspond to collapse of OPEC in 1986, invasion of Kuwait in 1990/91, Asian crisis in 1997/2000 and the Global Financial Crisis in 2008. While the oil price return volatility has positive impact on oil prices, it has limited negative impact on oil prices during periods corresponding to these historical events. Moreover, the findings from this study point out to the existence of a negative and small effect of the lagged oil return series on its volatility for both the spot and futures markets.

Suggested Citation

  • Mehmet Balcilar & Zeynel Abidin Ozdemir, 2017. "The nexus between the oil price and its volatility in a stochastic volatility in mean model with time-varying parameters," Working Papers 15-33, Eastern Mediterranean University, Department of Economics.
    • Handle: RePEc:emu:wpaper:15-33.pdf
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    More about this item

    Keywords

    Oil price; Oil price uncertainty; Spot and futures markets; Nonlinearity; Stochastic volatility; State–space.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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