Iranian Energy Economics

Introducing an Early Warning System for High Volatility in The Crude Oil OPEC Market: Markov Switching GARCH Approach

Document Type : Research Paper

Authors

Mahmood Mohammadi Alamuti 1
mohammad reza haddadi 2
Younes Nademi 3

1 master’s of Financial Mathematices, University of Ayatollah Boroujerdi, Borujerd

2 Assistant Professor of Mathematices, University of Ayatollah Borujerdi, Borujerd, Iran

3 Assistant Professor of Economics, University of Ayatollah Boroujerdi, Boroujerd, Iran

https://doi.org/10.22054/jiee.2018.9051
Abstract
Because of high reliance of Iranian economy to oil revenues, it is affected by the price volatility of the oil market. Therefore, the forecast of the oil price movement is very important at least in two aspects including determining the correct oil price in the government budget and also for controlling the high price volatility for macroeconomic policy makers. Based on the importance of forecasting oil price movement, the purpose of this paper is to present an Early Warning System (EWS) for high oil price volatility in the OPEC crude oil market. This system, by forecasting the probability of staying in high volatility oil price in future periods, give a proper view of the trend of oil prices to policy makers. For this purpose, in the first step, by a Markov Switching GARCH model, the oil price trend and its volatility have been modeled and estimated during the period of 2010-2016. Then, using this model, the transition probability matrix, which involves the probability of staying in the high-volatility and low-volatility regimes, and the probability of switching between the regimes, has been obtained. Based on this matrix, the probability of being in a low-volatility and high-volatility crude oil price have been forecasted. so the policymakers and activists in the oil market can make better decisions to avoid of damaging effects of high oil price volatility

Keywords

Early Warning System
OPEC Crude Oil Price
Forecasting
Markov Regime Switching GARCH Model
Iranian Energy Economics
Volume 7, Issue 25 - Serial Number 4
Winter 2018
Pages 159-192

  • Receive Date 18 November 2017
  • Accept Date 11 September 2018
  • First Publish Date 11 September 2018
  • Publish Date 22 December 2017

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