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An empirical analysis of the volume-volatility nexus in crude oil markets under structural breaks: Implications for forecasting

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  • Patra, Saswat
Abstract
The present study investigates how volume impacts volatility in crude oil markets, focusing on the Mixture of Distribution Hypothesis (MDH). Our results reveal a positive and significant volatility-volume association in the case of WTI spot markets. However, we cannot draw similar conclusions for Brent crude oil. Furthermore, we find that the presence of volume leads to only a negligible drop in the volatility persistence, thereby rejecting the claims of the MDH. By incorporating volume as a predictor for volatility and modelling the innovations using heavy-tailed distributions, our estimates of volatility for both Brent and WTI crude oil improve significantly. Our findings reveal that volume contains important information that can impact volatility and prices for crude oil. This has significant implications for market participants, institutional investors, as well as regulators as they can design better strategies and policies based on the volume of trade. Also, from the perspective of risk management and hedging, the results provide interesting insights. Our findings are consistent across different time periods, forecasting horizons and robust to alternative methodologies.

Suggested Citation

  • Patra, Saswat, 2024. "An empirical analysis of the volume-volatility nexus in crude oil markets under structural breaks: Implications for forecasting," International Review of Economics & Finance, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:reveco:v:94:y:2024:i:c:s105905602400426x
    DOI: 10.1016/j.iref.2024.103434
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    More about this item

    Keywords

    Volume; Volatility persistence; Crude oil; Mixture of distribution hypothesis;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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