TY - JOUR
T1 - Modeling energy price dynamics: GARCH versus stochastic volatility
AU - Chan, Chi Chun (Joshua)
AU - Grant, Angelia
PY - 2016
Y1 - 2016
N2 - We compare a number of GARCH and stochastic volatility (SV) models using nine series of oil, petroleum product and natural gas prices in a formal Bayesian model comparison exercise. The competing models include the standard models of GARCH(1,1) and SV with an AR(1) log-volatility process, as well as more flexible models with jumps, volatility in mean, leverage effects, and t distributed and moving average innovations. We find that: (1) SV models generally compare favorably to their GARCH counterparts; (2) the jump component and t distributed innovations substantially improve the performance of the standard GARCH, but are unimportant for the SV model; (3) the volatility feedback channel seems to be superfluous; (4) the moving average component markedly improves the fit of both GARCH and SV models; and (5) the leverage effect is important for modeling crude oil prices-West Texas Intermediate and Brent-but not for other energy prices. Overall, the SV model with moving average innovations is the best model for all nine series.
AB - We compare a number of GARCH and stochastic volatility (SV) models using nine series of oil, petroleum product and natural gas prices in a formal Bayesian model comparison exercise. The competing models include the standard models of GARCH(1,1) and SV with an AR(1) log-volatility process, as well as more flexible models with jumps, volatility in mean, leverage effects, and t distributed and moving average innovations. We find that: (1) SV models generally compare favorably to their GARCH counterparts; (2) the jump component and t distributed innovations substantially improve the performance of the standard GARCH, but are unimportant for the SV model; (3) the volatility feedback channel seems to be superfluous; (4) the moving average component markedly improves the fit of both GARCH and SV models; and (5) the leverage effect is important for modeling crude oil prices-West Texas Intermediate and Brent-but not for other energy prices. Overall, the SV model with moving average innovations is the best model for all nine series.
U2 - 10.1016/j.eneco.2015.12.003
DO - 10.1016/j.eneco.2015.12.003
M3 - Article
SN - 0140-9883
VL - 54
SP - 182
EP - 189
JO - Energy Economics
JF - Energy Economics
IS - 1
ER -