Modelling Oil Price Volatility Before, During and after the Global Financial Crisis

Abstract

In this paper, we evaluate the comparative performance of volatility models for oil price using daily returns of crude oil price. The innovations of this paper are in three folds: (i) we consider two prominent oil prices namely Brent and West Texas Intermediate (WTI); (ii) we analyse these prices across three subsamples namely periods before, during and after the global financial crisis; and (iii) we also analyse the comparative performance of both symmetric and asymmetric volatility models for these oil prices. We find inconsistent patterns in the performance of the volatility models over the subsamples. On the average, however, we find evidence of leverage effects in both oil prices and therefore, investors in the oil market react to news. Specifically, we find that bad news in the oil market increased volatility in crude oil price than good news. We also find high level of persistence in the volatility of WTI and Brent although the latter appears more persistent than the former while the period of global financial crisis recorded the highest level of persistence in both prices. Also, we find that during the global financial crisis, risk averse investors shifted assets from the oil market to other less risky assets.