Oil Price Volatility Forecast with Mixture Memory GARCH

Tony Klein, Thomas Walther
2015 Social Science Research Network  
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, RiskMetrics, EGARCH, APARCH, FI-GARCH, HYGARCH, and FIAPARCH). We incorporate an Expectation-Maximization algorithm for parameter estimation of the MMGARCH and find different structures in volatility level as well as shock persistence. MMGARCH is also able to cover asymmetric and long memory
more » ... ffects. Furthermore, a dissimilar memory structure in variance of WTI and Brent crude oil prices is observed which is supported by additional tests. Parameter estimation and comparison of the models reveal significant long memory and asymmetry in oil price returns. In regard of variance forecasting and Value-at-Risk prediction, it is shown 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. the participants of the 5th INREC in Essen and the 10th Energy and Finance Conference in London for advice, remarks, and hints. We are especially grateful to Muyi Li and Guodong Li for discussing their model and providing useful information. *
doi:10.2139/ssrn.2576875 fatcat:5iihnxvygjbqzcq7gnje5vglim