Crude oil price volatility dynamics and the great recession. Issue 8 (4th May 2019)

• Record Type: Journal Article
• Authors: Nonejad, Nima
• Is Part Of: Applied economics letters. Volume 26:Issue 8(2019)
• Page Start: 622
• Page End: 627
• Publication Date: 2019-05-04
• Subjects: Crude oil -- great recession -- realized volatility -- regime switching; C10 -- C22 -- C51 -- Q43; Economics -- Periodicals; Economics, Mathematical -- Periodicals; 330
• DOI: 10.1080/13504851.2018.1488051
• Languages: English
• ISSNs: 1350-4851

Abstract

ABSTRACT: Using a very simple econometric framework, we identify two major changes in the dynamics of crude oil price volatility based on data from 1997 to 2017. More precisely, we model weekly West Texas Intermediate (WTI) crude oil price realized volatility in a two-regime setting, one where realized volatility evolves as a plain autoregressive (AR) process (static), and the other where the level, persistence and innovation volatility of the AR process are subject to changes (dynamic). We use a Markov chain to model the probability that the process is in the static regime. The post Great Recession period sees a longer duration of the dynamic regime as well as smaller changes in the level and conditional volatility of realized volatility when switching actually occurs. Crude oil volatility also responds more aggressively to changes in economic variables, such as the t-bill rate and equity market volatility in the dynamic regime.