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Analysis of the Behavior of Volatility in Crude Oil Price

Author

Listed:
  • Fernando Antonio Lucena Aiube

    (a Petrobras and Departmentof Industrial Engineering - PUC – Rio, Rua Marquês de São Vicente,RJ, Brazil)

  • Tara Keshar Nanda Baidya

    (Programa de Pós-Graduação em Administração – PPGA Mestrado e Doutorado em Administração and Escola de Ciência e Tecnologia UNIGRANRIO.)

Abstract

This article analyzes volatility in the spot price of crude oil. In recent years the price has also increased reaching more than US$ 140/barrel in the last decade. Moreover, the negotiated trading volume in the futures market in recent years higher than the trading volume of the earlier years. How these changes have affected the volatility in the oil prices? Does the presence of huge players, which leads to an increase in the volume under negotiation, increase volatility? Has the persistence been affected? To answer these questions, we first estimated spot prices using the two-factor model of Schwartz and Smith. With this filtering process we can capture the entire information from the future term-structure. We then analyzed the estimated spot-price series to identify the stylized facts and then adjusted conditional volatility models of GARCH family. Our findings show that the volatility in the high prices period is not different from that of low prices. The shocks behaved as transitory and the persistence in the high prices period decreased. This fact has pricing and hedging implications for short-term derivatives.

Suggested Citation

  • Fernando Antonio Lucena Aiube & Tara Keshar Nanda Baidya, 2014. "Analysis of the Behavior of Volatility in Crude Oil Price," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 2(1), pages 64-72, February.
    • Handle: RePEc:lrc:lareco:v:2:y:2014:i:1:p:64-72
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    More about this item

    Keywords

    GARCH models; Two-factor model; Crude oil; Volatility.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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