Abstract
This paper examines the causes and behavior of price volatility in the US crude oil market. Although crude oil prices are among the most volatile, they have received limited academic scrutiny heretofore. This study shows that (1) the crude oil market is characterized by volatility persistence, (2) a negative shock has more impact on future volatility than an equal positive shock, (3) crude oil volatility is lower at higher prices, (4) OPEC meeting announcements and the Petroleum Status Report releases cause increased volatility, and (5) there is a day-of-the-week pattern in this market. I develop and employ an improved procedure for testing and quantifying the hypothesized volatility determinants within GARCH type model.
Highlights
This paper examines the causes and behavior of price volatility in the US crude oil market from January 1997 through December 2012
Crude oil volatility tends to increase on Wednesday as the standard deviation of Wednesday return is 15.15% higher than that of Tuesday return and the difference is significant at the 0.001 level
The contribution this paper makes is to provide an empirical examination of the causes and behavior of price volatility in the crude oil market
Summary
This paper examines the causes and behavior of price volatility in the US crude oil market from January 1997 through December 2012. The crude oil market experienced an unprecedented dramatic volatility in 2008 as crude oil prices reached an all-time high level of $145 per barrel in July and fell sharply to $30 per barrel in December. This large oil price fluctuation tendency has continued in recent years. In 2012, crude oil prices increased during the first quarter as concerns about possible international supply disruptions put an upward pressure on petroleum prices decreased during the second quarter before turning sharply upward in the third quarter This high variability in crude oil prices makes it extremely difficult for consumers to forecast their costs and for producers to forecast their profits.
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