Forecasting volatility and co-volatility of crude oil and gold futures: Effects of leverage,jumps, spillovers,and geopolitical risks

To forecast the covariance matrix for the returns of crude oil and gold futures, this paper examines the effects of leverage, jumps, spillovers, and geopolitical risks by using their respective realized covariance matrices. To guarantee the positive definiteness of the forecasts, we consider the full BEKK structure on the conditional Wishart model. By the specification, we can flexibly divide the direct and spillover effects of volatility feedback, negative returns, and jumps. The empirical analysis indicates the benefits of accommodating the spillover effects of negative returns, and the geopolitical risks indicator for modeling and forecasting the covariance matrix.     

Press freedom and jumps in stock prices

Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.     

噪声、跳跃与高频价格波动——基于门限预平均实现波动的分析

高频数据中的噪声和价格跳跃使得波动的估计缺乏一致性,本文提出用门限预平均实现波动的方法估计同时存在市场微观结构噪声和价格跳跃时高频价格波动,该方法是资产价格实际波动的一致估计,并有最优的收敛速度。模拟发现,门限预平均实现波动和常用的高频波动估计方法相比,有更小的均方误差。中国证券市场的实证分析表明,门限预平均实现波动能减少波动预测误差,得到更为精确的风险管理价值。     

Jumps in the convenience yield of crude oil

The potential presence of jumps and time-varying volatility in convenience yields can lead to abnormally fat tails, which has implications for investment in storage capacity, leasing and drilling for crude oil. In this paper we evaluate the potential for these features in convenience yields. To that end, we analyze the rate of change in convenience yields for five futures prices time horizons (1, 3-, 6-, 9- and 12-month ahead), allowing for the both jumps and time-varying volatility. We find that both features exert a statistically important effect on convenience yields, for each of the five time horizons. We also calculate the implied probability that at least one jump would occur on any date, which reveals a period of relative calm at the start of the fracking boom, when large stockpiles built up at the trading hub for West Texas Intermediate, and a period of considerable churn, after the ban on exporting crude oil was lifted. Both elements underscore a linkage between inventory holdings and convenience yields.     

Three-point approach for estimating integrated volatility and integrated covariance

Applying jump-robust methods to estimating integrated volatility is in the mainstream of financial econometrics. However, little if any attention has been devoted to the construction of a jump-free estimator for integrated covariance that overlooks the well-documented manifestation of joint jumps. Joint jumps are contemporaneous within the day. Therefore, this study proposes a three-point approach that not only deals with estimating volatility, but also constructs a singular-jump-free and joint-jump-free covariance. Since the basic idea of the three-point covariance is based on conditional quantiles, we also provide two alternative procedures for finding approximated estimations in practical applications. Based on this approach, our empirical results confirm that singular jumps and joint jumps occur on the Taiwan Futures Exchange.     

The role of jumps and leverage in forecasting volatility in international equity markets

We analyze the importance of jumps and the leverage effect on forecasts of realized volatility in a large cross-section of 18 international equity markets, using daily realized measures data from the Oxford-Man Realized Library, and two widely employed empirical models for realized volatility that allow for jumps and leverage. Our out-of-sample forecast evaluation results show that the separation of realized volatility into a continuous and a discontinuous (jump) component is important for the S&P 500, but of rather limited value for the remaining 17 international equity markets that we analyze. Only for 6 equity markets are significant and sizable forecast improvements realized at the one-step-ahead horizon, which, nevertheless, deteriorate quickly and abruptly as the prediction horizon increases. The inclusion of the leverage effect, on the other hand, has a much larger impact on all 18 international equity markets. Forecast gains are not only highly significant, but also sizeable, with gains remaining significant for forecast horizons of up to one month ahead.     

Earning the right premium on the right factor in portfolio planning

The optimal portfolio as well as the utility from trading stocks and derivatives depends on the risk factors and on their market prices of risk. We analyze this dependence for a CRRA investor in models with stochastic volatility, jumps in the stock price, and jumps in volatility. We find that the compartment of the total variance into diffusion risk and jump risk has a small impact on the utility in an incomplete market only. In contrast, the decomposition of the equity risk premium into a diffusion component and a jump risk component and the compartment of the latter into its various elements has a huge impact on the utility in a complete market. The more extreme the market prices of risk, i.e. the more they deviate from their equilibrium values, the larger the utility of the investor. Additionally, we show that the structure of the optimal exposures to jump risk crucially depends on which elements of jump risk are priced.     

The impact of co-jumps in the oil sector

We study the dynamics of the oil sector using a new multivariate stochastic volatility model with a structure of common factors subjected to jumps in mean and conditional variance. This model contributes to the literature allowing the estimation of spillover effects between assets in a multivariate framework through joint jumps (co-jumps), identifying the permanent and transitory effects through a structure defined by Bernoulli processes. The jump structure introduced in the article can be interpreted as a regime-switching model with an endogenous number of states, avoiding the difficulties associated with models with a fixed number of regimes. We apply the model to oil prices and stock prices of integrated oil companies. The jump structure allows dating the relevant events in the oil sector in the period 2000–2019. The period analyzed encompasses important events in the oil market such as the price escalation in 2008 and the falling prices in 2014. We also apply the model to estimate risk management measures and portfolio allocation and perform a comparison with other multivariate models of conditional volatility, showing the good properties of the model in these applications.