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Can inflation predict energy price volatility?

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  • Batten, Jonathan A.
  • Mo, Di
  • Pourkhanali, Armin

Abstract

Fluctuations in energy prices impact production costs and inflation. This study examines whether inflation data can predict volatility in energy markets. Both inflation and energy market volatility exhibit complex behaviour over time, including structural shifts due to demand and supply shocks. Accounting for differences in data frequencies, we use an extended GARCH model (MIDAS) with Laguerre polynomials for time-varying parameters. The empirical results demonstrate that including low-frequency inflation data enhances energy model predictability particularly during periods of high volatility and extreme price fluctuations. Considering inflation improves forecasting for energy market models, benefiting portfolio management and helping policymakers manage inflation.

Suggested Citation

  • Batten, Jonathan A. & Mo, Di & Pourkhanali, Armin, 2024. "Can inflation predict energy price volatility?," Energy Economics, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:eneeco:v:129:y:2024:i:c:s0140988323006564
    DOI: 10.1016/j.eneco.2023.107158
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    More about this item

    Keywords

    Energy market; Energy volatility models; Portfolio management; MIDAS models;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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