Do Oil Price Forecast Disagreement of Survey of Professional Forecasters Predict Crude Oil Return Volatility?

32 Pages Posted: 17 Jan 2024

See all articles by Anton Hasselgren

Anton Hasselgren

Jönköping International Business School - Jönköping University

Ai Jun Hou

Stockholm University

Sandy Suardi

University of Wollongong

Caihong Xu

Stockholm University - Stockholm Business School

Xiaoxia Ye

University of Exeter Business School - Department of Finance

Date Written: January 3, 2024

Abstract

This paper explores whether the dispersion in forecasted crude oil prices from the European Central Bank Survey of Professional Forecasters can provide insights for predicting crude oil return volatility. It is well-documented that higher disagreement among forecasters of asset price implies greater uncertainty and higher return volatility. Using several Generalized Autoregressive Conditional Heteroskedasticity with Mixed Data Sampling (GARCH-MIDAS) models, we find, based on the in-sample estimation results, the oil market experiences greater volatility when the forecasters’ disagreements increase. The model that integrates both historical realized variance and forward-looking forecaster disagreement into the conditional variance, along with the model focusing solely on pure forward-looking forecaster disagreement, exhibits a much superior fit to the data compared to the model relying solely on realized variance and the models considering forward-looking forecasted mean return. The out-of-sample forecasting results unequivocally illustrate that incorporating forecaster disagreement offers valuable insights, markedly enhancing the predictive accuracy of crude oil return volatility within the GARCH-MIDAS model. Moreover, we illustrate the economic benefit of considering forecasters’ disagreement when forecasting volatility, demonstrating its significance for VaR risk management.

Keywords: Crude oil market, GARCH-MIDAS, Professional forecasters, Disagreement

JEL Classification: C32, C52, Q47

Suggested Citation

Hasselgren, Anton and Hou, Ai Jun and Suardi, Sandy and Xu, Caihong and Ye, Xiaoxia, Do Oil Price Forecast Disagreement of Survey of Professional Forecasters Predict Crude Oil Return Volatility? (January 3, 2024). Available at SSRN: https://ssrn.com/abstract=4683784 or http://dx.doi.org/10.2139/ssrn.4683784

Anton Hasselgren

Jönköping International Business School - Jönköping University ( email )

Jönköping, 55111
Sweden

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Sandy Suardi

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Caihong Xu (Contact Author)

Stockholm University - Stockholm Business School ( email )

Roslagsvägen 1010
Stockholm, SE-106 91
Sweden

Xiaoxia Ye

University of Exeter Business School - Department of Finance ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

HOME PAGE: http://www.xiaoxiaye.me/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
29
Abstract Views
198
PlumX Metrics