IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

Prepress Content: The following article is a preprint of a scientific paper that has completed the peer-review process and been accepted for publication within The Energy Journal.

While the International Association for Energy Economics (IAEE) makes every effort to ensure the veracity of the material and the accuracy of the data therein, IAEE is not responsible for the citing of this content until the article is actually printed in a final version of The Energy Journal. For example, preprinted articles are often moved from issue to issue affecting page numbers, and actual volume and issue numbers. Care should be given when citing Energy Journal preprint articles.

What Should be Taken into Consideration when Forecasting Oil Implied Volatility Index?

Abstract:
This study forecasts the oil volatility index (OVX) incorporating information from other implied volatility (IV) indices. We provide evidence for the existence of long memory in the OVX in order to justify the use of the Heterogeneous AutoRegressive (HAR) model. We extend the HAR model by implementing a dynamic model averaging (DMA) method in order to allow for IV indices from other asset classes to be applicable at different time periods. Apart from the statistical evaluation, a straddle options trading strategy validates our results from an economic point of view. The IV of Dow Jones is highly significant for short- and mid-run forecasting horizons, whereas, at longer horizons, the IV of Energy Sector provides accurate forecasts but only from an economic point of view.

Download Executive Summary Purchase ( $25 )

Keywords: Crude oil, Implied volatility, HAR modeling, Trading strategies, Dynamic model averaging, Long memory

DOI: 10.5547/01956574.44.4.pdel

References: Reference information is available for this article. Join IAEE, log in, or purchase the article to view reference data.

Published in Volume 44, Number 5 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

© 2023 International Association for Energy Economics | Privacy Policy | Return Policy