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Jump Processes in the Market for Crude Oil

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  • Neil A. Wilmot
  • Charles F. Mason

Abstract

In many commodity markets, the arrival of new information leads to unexpectedly rapid changes—or jumps—in commodity prices. Such arrivals suggest the assumption that log-return relatives are normally distributed may not hold. Combined with time-varying volatility, the possibility of jumps offers a potential explanation for fat tails in oil price returns. This article investigates the potential presence of jumps and time-varying volatility in the spot price of crude oil and in futures prices. The investigation is carried out over three data frequencies (Monthly, Weekly, Daily j, which allows for an investigation of temporal properties. Employing likelihood ratio tests to compare among four stochastic data-generating processes, we find that that allowing for both jumps and time-varying volatility improves the model’s ability to explain spot prices at each level of temporal aggregation; this combination also provides a statistically compelling improvement in model fit for futures prices at the Daily and Weekly level. At the monthly level, allowing for jumps does not provide a statistically significant increase in model fit after incorporating time-varying volatility into the model.

Suggested Citation

  • Neil A. Wilmot & Charles F. Mason, 2013. "Jump Processes in the Market for Crude Oil," The Energy Journal, , vol. 34(1), pages 33-48, January.
    • Handle: RePEc:sae:enejou:v:34:y:2013:i:1:p:33-48
    DOI: 10.5547/01956574.34.1.2
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    5. Mason, Charles F. & A. Wilmot, Neil, 2014. "Jump processes in natural gas markets," Energy Economics, Elsevier, vol. 46(S1), pages 69-79.
    6. Olivier Rousse & Benoît Sévi, 2017. "Informed Trading in Oil-Futures Market," Working Papers hal-01460186, HAL.
    7. Jozef Baruník & Evžen KoÄ enda b,a & Lukáš Vácha, 2016. "Volatility Spillovers Across Petroleum Markets," The Energy Journal, , vol. 37(1), pages 136-158, January.
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    10. Arturo Lorenzo-Valdés, 2021. "Conditional Probability of Jumps in Oil Prices," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(4), pages 1-14, Octubre -.
    11. Kearney, Fearghal & Murphy, Finbarr & Cummins, Mark, 2015. "An analysis of implied volatility jump dynamics: Novel functional data representation in crude oil markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 199-216.
    12. Mason, Charles F. & Wilmot, Neil A., 2024. "On climate fat tails and politics," Resources Policy, Elsevier, vol. 92(C).
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    14. Yaojie Zhang & Yudong Wang & Feng Ma & Yu Wei, 2022. "To jump or not to jump: momentum of jumps in crude oil price volatility prediction," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-31, December.
    15. Neil A. Wilmot, 2019. "Heavy Metals: Might as Well Jump," IJFS, MDPI, vol. 7(2), pages 1-14, June.
    16. Neil A. Wilmot, 2013. "Cointegration in the Oil Market among Regional Blends," International Journal of Energy Economics and Policy, Econjournals, vol. 3(4), pages 424-433.
    17. Mason, Charles F. & Wilmot, Neil A., 2020. "Jumps in the convenience yield of crude oil," Resource and Energy Economics, Elsevier, vol. 60(C).
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    More about this item

    Keywords

    Crude Oil prices; Jump diffusion; GARCH;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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