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| Author: | Fong, W. M. See, K. H. |
| Title: | Basis variations and regime shifts in the oil futures market |
| Journal: | European Journal of Finance
2003 : OCT, VOL. 9:5, p. 499-513 |
| Index terms: | Oil industry Futures markets |
| Freeterms: | GARCH persistence |
| Language: | eng |
| Abstract: | The conditions volatility of crude oil futures returns is modelled as a regime switching process. The model features transition probabilities that are functions of the basis. Consistent with the theory of storage, in volatile periods, an increase in backwardation is associated with an increase in the likelihood of switching to or remaining in the high-volatility state. Conditional on regimes, GARCH persistence is significantly reduced. Out-of-sample tests show that incorporating regime shifts improves the accuracy of short-term volatility forecasts. |
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