Abstract
This article analyzes volatility in the spot price of crude oil. In recent years the price has also increased reaching more than US$ 140/barrel in the last decade. Moreover, the negotiated trading volume in the futures market in recent years higher than the trading volume of the earlier years. How these changes have affected the volatility in the oil prices? Does the presence of huge players, which leads to an increase in the volume under negotiation, increase volatility? Has the persistence been affected? To answer these questions, we first estimated spot prices using the two-factor model of Schwartz and Smith. With this filtering process we can capture the entire information from the future term-structure. We then analyzed the estimated spot-price series to identify the stylized facts and then adjusted conditional volatility models of GARCH family. Our findings show that the volatility in the high prices period is not different from that of low prices. The shocks behaved as transitory and the persistence in the high prices period decreased. This fact has pricing and hedging implications for short-term derivatives.
Highlights
This article analyzes the behavior of volatility in the spot price of crude oil
(1) Is recent volatility different from that when prices varied within significantly lower price ranges? (2) The current market appears to be more speculative, but is it necessarily more volatile? (3) How does the volatility behave during the transition period when prices moved systematically to the recent higher levels? (4) Have the price shocks been essentially transitory or do they exhibit persistence? We studied volatility in oil prices based on GARCH models
This article analyzed the behavior of volatility of oil spot prices
Summary
HIGHLIGHTS: 1. We study the behavior of the volatility in crude oil spot prices series comparing low and high prices regime. We study the behavior of the volatility in crude oil spot prices series comparing low and high prices regime. 2. We filtered the future term-structure to estimate spot price series. 3. Estimated series has the same stylized properties observed on equities and futures, traded on exchanges. 4. The volatility, estimated with GARCH models, do not differ between low and prices regimes. 5. The persistence during the high prices regime decreased
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