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|Title:||Basis variations and regime shifts in the oil futures market|
|Authors:||Fong, W.M. |
Crude oil futures
|Citation:||Fong, W.M.,See, K.H. (2003). Basis variations and regime shifts in the oil futures market. European Journal of Finance 9 (5) : 499-513. ScholarBank@NUS Repository. https://doi.org/10.1080/1351847032000082808|
|Abstract:||The conditional volatility of crude oil futures returns is modelled as a regime switching process. The model features transition probabilities that are functions of the basis. Consistent with the theory of storage, in volatile periods, an increase in backwardation is associated with an increase in the likellihood of switching to or remaining in the high-volatility state. Conditional on regimes, GARCH persistence is significantly reduced. Out-of-sample tests show that incorporating regime shifts improves the accuracy of short-term volatility forecasts.|
|Source Title:||European Journal of Finance|
|Appears in Collections:||Staff Publications|
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