Premium
Estimating Volatility Persistence in Oil Prices Under Structural Breaks
Author(s) -
Ewing Bradley T.,
Malik Farooq
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00283.x
Subject(s) - volatility (finance) , economics , valuation (finance) , autoregressive conditional heteroskedasticity , monetary economics , oil price , persistence (discontinuity) , econometrics , financial market , financial economics , volatility smile , finance , geotechnical engineering , engineering
Policy makers and financial market participants are interested in knowing how shocks affect the volatility of oil prices over time. We accurately compute the volatility persistence by incorporating endogenously determined structural breaks into a GARCH model. Contrary to previous findings, we find that oil shocks dissipate very quickly but have a strong initial impact. Understanding this behavior is not only important for derivative valuation and hedging decisions but for broader financial markets and the overall economy, for which there are significant consequences.