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On the Oil Price Uncertainty

Abstract:
This study focuses on oil price volatility and uncertainty over the period January 1986-December 2018, covering episodes of oil price increases and collapses. Accordingly, in line with Poon and Granger (2003), and Terasvirta and Zhao (2011), we propose three different specifications of stochastic oil volatility: standard stochastic volatility, stochastic volatility moving average, leverage stochastic volatility models. We compute the out-of-sample forecasts for the uncertainty in oil prices using the estimates for these three stochastic oil price volatility models and we discuss its effects. Our findings show that the standard stochastic volatility model outperforms the other two models when focusing on oil price uncertainty. This finding is relevant to better forecast and understand the effects of oil price uncertainty on the real economy.

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Keywords: Oil volatility, Oil price uncertainty, Stochastic volatility models, Forecasting.

DOI: 10.5547/01956574.40.SI2.zfti

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Published in Volume 40, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.