The role of global economic policy uncertainty in predicting crude oil futures volatility: Evidence from a two-factor GARCH-MIDAS model. (September 2022)

• Record Type: Journal Article
• Authors: Dai, Peng-Fei; Xiong, Xiong; Zhang, Jin; Zhou, Wei-Xing
• Is Part Of: Resources policy. Volume 78(2022)
• Publication Date: 2022-09
• Subjects: Crude oil futures -- Global economic policy uncertainty -- Volatility forecasting -- GARCH-MIDAS -- Two-factor model; Mines and mineral resources -- Periodicals; Ressources minérales -- Périodiques; Ressources naturelles -- Gestion -- Périodiques; Environnement -- Politique gouvernementale -- Périodiques; 333.8
• DOI: 10.1016/j.resourpol.2022.102849
• Languages: English
• ISSNs: 0301-4207

Abstract

Abstract: The fluctuations in global policy affect the volatility of international crude oil markets. It is quite meaningful to analyze the impact of policy uncertainty on crude oil market volatility from a global integration perspective in deep. This paper aims to examine whether the global uncertainty of economic policy (GEPU) and the uncertainty of uncertainty (GEPU change) have different impacts on crude oil futures volatility. We establish two types of models under the GARCH-MIDAS framework, single-factor model and two-factor model, for discussing their explanatory and predictive power when considering the historical realized volatility. The findings show the GEPU index and its changes are consistent effective predictive factors in volatility of crude oil futures market when only individual effect is considered. Specially, GEPU change has stronger predictive power than GEPU index. Furthermore, the two-factor model with GEPU change contains more information which holds stronger forecasting ability in crude oil futures market volatility. However, GEPU cannot be an effective forecast factor when taking the influence of realized volatility into account. Highlights: Two-factor GARCH-MIDAS models are set up to study the crude oil futures volatility. GEPU changes have stronger predictive power than the GEPU index. Two-factor models exhibit stronger forecasting ability than single-factor models. GEPU changes are indeed the source of long-term volatility of the crude oil futures.