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An introduction to oil market volatility analysis
Author(s) -
Matar Walid,
AlFattah Saud M.,
Atallah Tarek,
Pierru Axel
Publication year - 2013
Publication title -
opec energy review
Language(s) - English
Resource type - Journals
eISSN - 1753-0237
pISSN - 1753-0229
DOI - 10.1111/opec.12007
Subject(s) - volatility (finance) , economics , volatility swap , econometrics , volatility smile , implied volatility , futures contract , financial economics , volatility risk premium , stochastic volatility , oil price , forward volatility , monetary economics
Modelling and forecasting crude oil price volatility is crucial in many financial and investment applications. The main purpose of this paper is to review and assess the current state of oil market volatility knowledge. It highlights the properties and characteristics of the oil price volatility that models seek to capture, and discuss the different modelling approaches to oil price volatility. Asymmetric response to price change, persistence and mean reversion, structural breaks, and possible market spillover of volatility are discussed. To complement the discussion, W est T exas I ntermediate futures price data are used to illustrate these properties using non‐parametric and conditional modelling methods. The generalised autoregressive conditional heteroskedasticity‐type models usually applied in the oil price volatility literature are also explored. We additionally examine the exogenous factors that may influence volatility in the oil markets.