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Modeling and predicting oil VIX: Internet search volume versus traditional mariables

Author

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  • Campos, I.
  • Cortazar, G.
  • Reyes, T.

Abstract

As a key variable in option pricing models and monetary policy decisions, volatility is an important factor in valuing and hedging investments. This paper models and predicts the CBOE Crude Oil Volatility Index using Heterogeneous Autoregressive (HAR) models that include traditional macro-finance variables as well as abnormal search volume from Google (ASVI). We find that a pure HAR model fits oil volatility remarkably well. When adding ASVI, we discover that this variable has a significant and positive relationship with oil volatility. This relationship remains statistically significant when traditional financial and macroeconomic variables are accounted for; therefore, ASVI is not only a good proxy for traditional macro-finance variables, but also carries additional information. More importantly, out-of-sample predictions show that ASVI has high economic value, allowing traders of volatility-exposed portfolios to significantly increase returns.

Suggested Citation

  • Campos, I. & Cortazar, G. & Reyes, T., 2017. "Modeling and predicting oil VIX: Internet search volume versus traditional mariables," Energy Economics, Elsevier, vol. 66(C), pages 194-204.
    • Handle: RePEc:eee:eneeco:v:66:y:2017:i:c:p:194-204
    DOI: 10.1016/j.eneco.2017.06.009
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    More about this item

    Keywords

    Oil VIX; Internet search volume; Implied volatility; Heterogeneous autoregressive model;
    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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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