Volatility Forecasting Across Tanker Freight Rates: The Role of Oil Price Shocks

Abstract

This paper examines whether the inclusion of oil price shocks of different origin as exogenous variables in a wide set of GARCH-X models improves the accuracy of their volatility forecasts for spot and 1-year time-charter tanker freight rates. Kilian's (2009) oil price shocks of different origin enter GARCH-X models which, among other stylized facts of the freight rates examined, take into account the presence of asymmetric and long-memory effects in tanker freight rates. The results reveal that the inclusion of aggregate oil demand shocks and precautionary oil-specific demand shocks (price) significantly improves the accuracy of the volatility forecasts drawn.