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Forecasting volatility and correlation between oil and gold prices using a novel multivariate GAS model

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  • Chen, Rongda
  • Xu, Jianjun

Abstract

Forecasting the volatility and correlation among different kinds of assets has important applications in areas such as risk management, options pricing, and asset allocation. This paper mainly uses a novel multivariate Generalized Autoregressive Score (GAS) model to analyze and forecast volatilities and correlations between Brent, WTI and gold prices. The time-varying parameters of multivariate GAS model for a given distribution of crude oil and gold prices is observed which is supported by Doornik-Hansen test. The testing results of time-varying parameters based on LRT statistics reveal that the dependent structure between Brent and gold prices is more complex than those of WTI and gold. The estimation results show that the multivariate GAS method well captures the volatility persistence and nonlinear interaction effects between the crude oil and gold markets. In addition, we compare the forecasting performance of the GAS with the classical Dynamic Conditional Correlation Generalized Auto-Regressive Conditional Heteroskedasticity (DCC-GARCH) model, and find that the forecasting power of volatility and correlation in multivariate GAS model is better than the DCC-GARCH model.

Suggested Citation

  • Chen, Rongda & Xu, Jianjun, 2019. "Forecasting volatility and correlation between oil and gold prices using a novel multivariate GAS model," Energy Economics, Elsevier, vol. 78(C), pages 379-391.
    • Handle: RePEc:eee:eneeco:v:78:y:2019:i:c:p:379-391
    DOI: 10.1016/j.eneco.2018.11.011
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    More about this item

    Keywords

    Forecasting; Oil price; Gold price; Volatility and correlation; Multivariate GAS model; DCC-GARCH 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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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