Ex-ante Determinants of Volatility in the Crude Oil Market

Abstract

This paper examines the causes and behavior of price volatility in the US crude oil market. Although crude oil prices are among the most volatile, they have received limited academic scrutiny heretofore. This study shows that (1) the crude oil market is characterized by volatility persistence, (2) a negative shock has more impact on future volatility than an equal positive shock, (3) crude oil volatility is lower at higher prices, (4) OPEC meeting announcements and the Petroleum Status Report releases cause increased volatility, and (5) there is a day-of-the-week pattern in this market. I develop and employ an improved procedure for testing and quantifying the hypothesized volatility determinants within GARCH type model.