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

Queen's University Belfast - Queen's Management School

Thomas Walther

Utrecht University - School of Economics

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)

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

HOME PAGE: http://www.tony-klein.info

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

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