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Forecasting the oil prices: What is the role of skewness risk?

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  • Yin, Libo
  • Wang, Yang

Abstract

Crude oil is crucial to the operation and economic well-being of the modern society. Huge changes of crude oil price always cause panics to the global economy. This paper aims to investigate the predictability of the skewness risk of oil to directly forecast oil prices. We find that the skewness risk of oil does exhibit statistically and economically significant in-sample and out-of-sample forecasting power under OLS regressions. Moreover, the strength of the predictive evidence is substantial during recessions, and robust when controlling for a set of variables. Furthermore, the skewness risk of oil reveals substantial economic value for investors, in terms of superior oil risk premium forecasts and sizable utility gains.

Suggested Citation

  • Yin, Libo & Wang, Yang, 2019. "Forecasting the oil prices: What is the role of skewness risk?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 534(C).
    • Handle: RePEc:eee:phsmap:v:534:y:2019:i:c:s037843711930175x
    DOI: 10.1016/j.physa.2019.02.022
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