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What Should be Taken into Consideration when Forecasting Oil Implied Volatility Index?

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  • Panagiotis Delis
  • Stavros Degiannakis
  • Konstantinos Giannopoulos

Abstract

This study forecasts the oil volatility index (OVX) incorporating information from other implied volatility (IV) indices. We provide evidence for the existence of long memory in the OVX in order to justify the use of the Heterogeneous AutoRegressive (HAR) model. We extend the HAR model by implementing a dynamic model averaging (DMA) method in order to allow for IV indices from other asset classes to be applicable at different time periods. Apart from the statistical evaluation, a straddle options trading strategy validates our results from an economic point of view. The IV of Dow Jones is highly significant for short- and mid-run forecasting horizons, whereas, at longer horizons, the IV of Energy Sector provides accurate forecasts but only from an economic point of view.

Suggested Citation

  • Panagiotis Delis & Stavros Degiannakis & Konstantinos Giannopoulos, 2023. "What Should be Taken into Consideration when Forecasting Oil Implied Volatility Index?," The Energy Journal, , vol. 44(5), pages 231-250, September.
    • Handle: RePEc:sae:enejou:v:44:y:2023:i:5:p:231-250
    DOI: 10.5547/01956574.44.4.pdel
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    More about this item

    Keywords

    Crude oil; Implied volatility; HAR modeling; Trading strategies; Dynamic model averaging; Long memory;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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