FOROIL · Objective-based forecast evaluations for crude oil volatility.

Objective-based forecast evaluations for crude oil volatility.

Oil price volatility forecasting is of major importance due to the financialisation of the oil market and the fact that the oil market participants’ decisions are based on such forecasts (e.g. oil-intensive industries, policy makers, portfolio traders). Currently, forecasters mainly predict oil price conditional and realized volatility using primarily GARCH and HAR models and evaluate the forecasts’ performance using statistical loss functions. Nevertheless, oil price volatility users are faced with (i) multiple volatility measures apart from conditional and realized, (ii) multiple forecasting models and (iii) different applications for which they use oil price volatility forecasts (e.g. policy making, portfolio allocation, risk management). Hence, the evaluation of the different forecasts using statistical loss functions is not adequate. Thus, in order to make informed decisions, oil volatility users need to know the most appropriate volatility measure in combination with the most accurate forecasting model. Thus, this project provides a framework which considers a range of volatility measures and models and allows oil volatility users to choose the most appropriate volatility measure combined with the best forecasting model, according to the economic decision for which the forecast will be used. To achieve this we develop loss functions that reflect the purpose of the oil price volatility forecasts, i.e. objective-based loss functions rather than stand-alone statistical ones. The development of such framework allows participants to make informed decisions which lead to better policy mix by policy makers, portfolio allocation by investors, or well-performed risk management by oil-intensive industries or regulators. By contrast, should end-users evaluate the forecasts based on statistical loss functions, then their economic decisions are sub-optimal. Hence, this innovative project has laid the foundations for an advanced econometric model framework to be used as a policy and practice suite of tools for the evaluation of the most appropriate oil volatility measures combined with the most accurate forecasting models, based on objective-based loss functions.

Текст от CORDIS, на английски · Данни: CORDIS, © Европейски съюз