Estimating Volatility Persistence in Oil Prices Under Structural Breaks

Bradley T. Ewing · Farooq Malik

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Market Dynamics and Volatility Economics of Agriculture and Food Markets Financial Risk and Volatility Modeling

Abstract

Abstract 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.

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1980Irreversibility, Uncertainty, and Cyclical Investment 1998Answering the Skeptics: Yes, Standard Volatility Models do Provide Accurate Forecasts 1992Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances 2000What is an Oil Shock?1999Oil price shocks and stock market activity 1996Oil and the Stock Markets

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