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Oil price volatility forecasts: What do investors need to know?
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Oil price volatility forecasts: What do investors need to know?

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  • Degiannakis, Stavros
  • Filis, George

Abstract

Contrary to the current practice that mainly considers stand-alone statistical loss functions, the aim of the paper is to assess oil price volatility forecasts based on objective-based evaluation criteria, given that different forecasting models may exhibit superior performance at different applications. Thus, we forecast the implied and several intraday oil price volatilities and we evaluate them based on financial decisions for which these forecasts are used. Confining our interest on the use of such forecasts from financial investors, we consider four well-established volatility trading strategies. We evaluate the after-cost profitability of each forecasting model for 1-day up to 66-days ahead. Our results convincingly show that our forecasting framework is economically useful, since different models provide superior after-cost profits depending on the economic use of the volatility forecasts. Should investors evaluate the forecasting models based on statistical loss functions, then their financial decisions are sub-optimal. Several robustness tests confirm these findings.

Suggested Citation

  • Degiannakis, Stavros & Filis, George, 2022. "Oil price volatility forecasts: What do investors need to know?," Journal of International Money and Finance, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:jimfin:v:123:y:2022:i:c:s026156062100245x
    DOI: 10.1016/j.jimonfin.2021.102594
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    Citations

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    Cited by:

    1. Eleftheria Kafousaki & Stavros Degiannakis, 2023. "Forecasting VIX: the illusion of forecast evaluation criteria," Economics and Business Letters, Oviedo University Press, vol. 12(3), pages 231-240.
    2. Zhang, Yue-Jun & Zhang, Han, 2023. "Volatility forecasting of crude oil futures market: Which structural change-based HAR models have better performance?," International Review of Financial Analysis, Elsevier, vol. 85(C).
    3. Tumala, Mohammed M. & Salisu, Afees & Nmadu, Yaaba B., 2023. "Climate change and fossil fuel prices: A GARCH-MIDAS analysis," Energy Economics, Elsevier, vol. 124(C).
    4. Panagiotis Delis & Stavros Degiannakis & Konstantinos Giannopoulos, 2023. "What Should be Taken into Consideration when Forecasting Oil Implied Volatility Index?," The Energy Journal, , vol. 44(5), pages 231-250, September.
    5. Zhang, Yaojie & He, Mengxi & Wang, Yudong & Liang, Chao, 2023. "Global economic policy uncertainty aligned: An informative predictor for crude oil market volatility," International Journal of Forecasting, Elsevier, vol. 39(3), pages 1318-1332.
    6. Gong, Xue & Ye, Xin & Zhang, Weiguo & Zhang, Yue, 2023. "Predicting energy futures high-frequency volatility using technical indicators: The role of interaction," Energy Economics, Elsevier, vol. 119(C).
    7. Wang, Yuejing & Ye, Wuyi & Jiang, Ying & Liu, Xiaoquan, 2024. "Volatility prediction for the energy sector with economic determinants: Evidence from a hybrid model," International Review of Financial Analysis, Elsevier, vol. 92(C).
    8. Degiannakis, Stavros & Filis, George, 2023. "Oil price assumptions for macroeconomic policy," Energy Economics, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    Volatility forecasting; Implied volatility; Intraday volatility; WTI crude oil futures; Objective-based evaluation criteria;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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