Oil Price Volatility Forecast with Mixture Memory GARCH

33 Pages Posted: 29 Mar 2015 Last revised: 27 Mar 2018

See all articles by Tony Klein

Tony Klein

Chemnitz University of Technology (CUT) - Department of Economics

Thomas Walther

Utrecht University - School of Economics; Dresden University of Technology - Faculty of Economics and Business Management

Date Written: April 1, 2016

Abstract

First Version: 03/11/2015 This Version: 04/01/2016

We expand the literature of volatility and Value-at-Risk forecasting of oil price returns by comparing the recently proposed Mixture Memory GARCH (MMGARCH) model to other discrete volatility models (GARCH, FIGARCH, and HYGARCH). We incorporate an Expectation-Maximization algorithm for parameter estimation of the MMGARCH and find regimes that differ in volatility level as well as shock persistence. Furthermore, we observe dissimilar memory structure in variance of WTI and Brent crude oil prices which is confirmed by altering the mixture components. In regard of variance forecasting and Value-at-Risk prediction, we show that MMGARCH outperforms the aforementioned models due to its dynamic approach in varying the volatility level and memory of the process. We find MMGARCH superior for application in risk management as a result of its flexibility in adjusting to variance shifts and shocks.

Keywords: FIGARCH, GARCH, long memory, mixture memory, oil price volatility, Value-at-Risk, volatility regimes

JEL Classification: C5, G1, G2

Suggested Citation

Klein, Tony and Walther, Thomas, Oil Price Volatility Forecast with Mixture Memory GARCH (April 1, 2016). Energy Economics, Vol. 58, 2016, Available at SSRN: https://ssrn.com/abstract=2576875 or http://dx.doi.org/10.2139/ssrn.2576875

Tony Klein (Contact Author)

Chemnitz University of Technology (CUT) - Department of Economics ( email )

Chemnitz
Germany

Thomas Walther

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.thomas-walther.info

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

HOME PAGE: http://www.tu-dresden.de/wiwi/finance

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