Modeling Asymmetric Volatility In Oil Prices

Abstract

Recent volatility in crude oil prices has affected economies around the world, especially the US economy, which is the largest consumer of oil. This paper focuses on how shocks to volatility of crude oil prices may affect future oil prices. The paper uses daily crude oil price data for the past 10 years to test and model the oil price volatility by fitting different variations of GARCH including a univariate asymmetric GARCH model to the series. Tests show high persistence and asymmetric behavior in oil price volatility, and reveal that negative and positive news have a different impact on oil price volatility. These results will help interested observers better understanding of the energy markets and has important consequences for the overall economy.