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Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models

Author

Listed:
  • Aldo Levy

    (LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action - CNAM - Conservatoire National des Arts et Métiers [CNAM])

  • M.H. Arouri
  • Amine Lahiani

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Duc Khuong Nguyen

    (IPAG Business School)

Abstract

This paper extends previous studies by investigating the relevance of structural breaks and long memory in modeling and forecasting the conditional volatility of oil spot and futures prices using a variety of GARCH-type models. Our results can be summarized as follows. First, we provide evidence of parameter instability in five out of nine GARCH-based conditional volatility processes for energy prices. Second, long memory is effectively present in all the series considered and a FIGARCH model seems to better fit the data, but the degree of volatility persistence diminishes significantly after adjusting for structural breaks. Finally, the out-of-sample analysis shows that volatility models accommodating instability and long memory characteristics of the data provide the best volatility forecasts for most cases.

Suggested Citation

  • Aldo Levy & M.H. Arouri & Amine Lahiani & Duc Khuong Nguyen, 2012. "Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models," Post-Print halshs-01279906, HAL.
    • Handle: RePEc:hal:journl:halshs-01279906
    DOI: 10.1016/j.eneco.2011.10.015
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    More about this item

    Keywords

    Oil markets; Volatility forecasting; Long memory; Structural breaks; GARCH-class models;
    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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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