Title: GARCH model and predictive performance of volatility forecasting: evidence from oil market

Authors: Darush Yazdanfar

Addresses: Department of Social Sciences, Mid Sweden University, Regementsgatan 25-27, Östersund 831 25, Sweden

Abstract: This study investigates the predictive performance of the GARCH (1, 1) model in forecasting the return volatility of the three major items on the oil market, WTI crude, Brent crude and heating oil, for horizons of one, five, twenty and thirty days ahead. The empirical results indicate that the predictive performance of the GARCH model is best for short horizons, from one day ahead for WTI, one to five days ahead for Brent and one to twenty days ahead for heating oil, at the 5% significant level. For horizons from twenty days ahead, no robust forecasting model can be observed for any of these items. Thus, although the results show that the GARCH (1, 1) model has high predictive performance in forecasting the volatility for the short-term horizons, it cannot produce reliable results when the forecast horizon increases. The findings also show how volatility clustering on returns emerges on the oil market, which creates periods of high volatility followed by small movements.

Keywords: GARCH model; oil prices; volatility forecasting; volatility clustering; price shocks; WTI crude; Brent crude; heating oil; predictive performance; reliability; crude oil.

DOI: 10.1504/WREMSD.2015.072040

World Review of Entrepreneurship, Management and Sustainable Development, 2015 Vol.11 No.4, pp.345 - 357

Published online: 30 Sep 2015 *

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