Do oil price forecast disagreement of survey of professional forecasters predict crude oil return volatility?

This paper explores whether the dispersion in forecasted crude oil prices from the European Central Bank Survey of Professional Forecasters can provide insights for predicting crude oil return volatility. It is well-documented that higher disagreement among forecasters of asset price implies greater uncertainty and higher return volatility. Using several Generalized Autoregressive Conditional Heteroskedasticity with Mixed Data Sampling (GARCH-MIDAS) models, we find, based on the in-sample estimation results, the oil market experiences greater volatility when the forecasters’ disagreements increase. The model that integrates both historical realized variance and forward-looking forecaster disagreement into the conditional variance, along with the model focusing solely on pure forward-looking forecaster disagreement, exhibits a much superior fit to the data compared to the model relying solely on realized variance and the models considering forward-looking forecasted mean return. The out-of-sample forecasting results unequivocally illustrate that incorporating forecaster disagreement offers valuable insights, markedly enhancing the predictive accuracy of crude oil return volatility within the GARCH-MIDAS model. Moreover, we illustrate the economic benefit of considering forecasters’ disagreement when forecasting volatility, demonstrating its significance for VaR risk management.