A detailed look at crude oil price volatility prediction using macroeconomic variables

Abstract

We investigate whether crude oil price volatility is predictable by conditioning on macroeconomic variables. We consider a large number of predictors, take into account the possibility that relative predictive performance varies over the out-of-sample period, and shed light on the economic drivers of crude oil price volatility. Results using monthly data from 1983:M1 to 2018:M12 document that variables related to crude oil production, economic uncertainty and variables that either describe the current stance or provide information about the future state of the economy forecast crude oil price volatility at the population level 1 month ahead. On the other hand, evidence of finite-sample predictability is very weak. A detailed examination of our out-of-sample results using the fluctuation test suggests that this is because relative predictive performance changes drastically over the out-of-sample period. The predictive power associated with the more successful macroeconomic variables concentrates around the Great Recession until 2015. They also generate the strongest signal of a decrease in the price of crude oil towards the end of 2008. KEYWORDS Crude oil price volatility, forecast evaluation, macroeconomic variables, realized volatility tigated the macroeconomic determinants of long-term volatility and correlation between equity and crude oil price returns from an in-sample perspective. 2 The authors found that changes in long-term crude oil price volatility could be explained by various measures of US macroeconomic activity. Pan et al. (2017) went beyond Conrad et al. and evaluated whether incorporating macroeconomic information further improved the accuracy of crude oil price volatility forecasts. While the Markov-switching others, Chan & Grant, 2016; Kang et al., 2009;Wang et al., 2016; Wei et al., 2010), the topic of whether incorporating information from macroeconomic variables can help forecast crude oil price volatility has received less attention in the literature. 2 As correctly pointed out by a reviewer, there are a number of studies that focus on in-sample analysis (see, e.g.,

Testing oil price volatility during Covid-19: Global economic impact

“…Modifications to the balanced investment and the intertemporal budget restraints form the pathway of exchange rates. Hence, the crude cost unpredictability is a rationale for predicting exchange rate flows, particularly for crude suppliers ( Nonejad, 2020 ).…”