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Forecasting value‐at‐risk in oil prices in the presence of volatility shifts
Author(s) -
Ewing Bradley T.,
Malik Farooq,
Anjum Hassan
Publication year - 2019
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1047
Subject(s) - volatility (finance) , economics , econometrics , oil price , kurtosis , normality , value at risk , volatility risk premium , volatility smile , forward volatility , realized variance , financial economics , monetary economics , risk management , finance , statistics , mathematics
Abstract Recent evidence suggests shifts (structural breaks) in the volatility of returns causes non‐normality by significantly increasing kurtosis. In this paper, we endogenously detect significant shifts in the volatility of oil prices and incorporate this information to estimate Value‐at‐Risk (VaR) to accurately forecast large declines in oil prices. Our out‐of‐sample performance results indicate that the model, which incorporates both time varying volatility (without making any distributional assumptions) and shifts in volatility, produces more accurate VaR forecasts than several benchmark methods. We make a timely contribution as the recent more frequent occurrences of unexpected large oil price declines has gained significant attention because of its substantial impact on the financial markets and the global economy.