Volatility Persistence in Crude Oil Markets

Amélie Charles (1) , Olivier Darné (2)

1 Audencia Recherche
2 LEMNA - Laboratoire d'économie et de management de Nantes Atlantique

Financial market participants and policy-makers can benefit from a better understanding of how shocks can affect volatility over time. This study assesses the impact of structural changes and outliers on volatility persistence of three crude oil markets - Brent, West Texas Intermediate (WTI) and Organization of Petroleum Exporting Countries (OPEC) - between January 2, 1985 and June 17, 2010. Firstly, we identify the time points at which structural changes occurred using the modified ICSS test developed by Sansó et al. (2004) and then incorporate this information into the volatility modeling. Our results indicated that the degree of persistence of volatility is reduced by incorporating the variance changes into the volatility model. Secondly, we identify outliers using intervention analysis and conditional heteroscedasticity model. These large shocks can be associated with particular event patterns, such as the invasion of Kuwait by Iraq, the Operation Desert Storm, the Operation Desert Fox, and the Global Financial Crisis as well as OPEC announcements on production reduction or US announcements on crude inventories. We show that outliers can bias the estimation of the persistence of the volatility. Taking into account outliers on the volatility modelling process may improve the understanding of volatility in crude oil markets.

Mots clés: Crude oil; volatility persistence; structural breaks; outliers; GARCH

Domaines: Economies et finances

Amélie Charles, Olivier Darné. Volatility Persistence in Crude Oil Markets. 2012. ⟨hal-00719387⟩