Time Series Analysis of Volatility in the Petroleum Pricing Markets: The Persistence, Asymmetry and Jumps in the Returns Series

Abstract

The petroleum energy market is becoming more volatile owing to recent fluctuations in oil price, which in the long run affects the pricing and volatility persistence levels of other petroleum products. Apart from the symmetry and asymmetry that are known with volatility series, jumps have recently been identified, while the symmetric and asymmetric models failed in predicting the jump components in the financial series. The historical prices of crude oil and its distilled constituents possess occasional jumps as a result of global political or economic constraints. We applied both fractional persistence and volatility modelling frameworks in studying the volatility persistence in crude oil and petroleum products prices. We chose among symmetric, asymmetric and jumps volatility models. Results indicated that prices of crude oil and gasoline were less persistent when compared with volatility series of other petroleum products. The newly proposed jump volatility model variants outperformed other existing volatility models in predicting the volatility in the prices of crude oil, heating oil and diesel. The exception was the Asymmetric Power ARCH (APARCH) model, which emerged best in predicting the prices of gasoline, kerosene and propane prices; but GAS variants were still ranked second and third competing models in predicting the volatility in gasoline and kerosene prices. Using wrongly specified model for predicting the volatility in petroleum pricing can misinform oil markets, thereby generating intense conditional oil market volatility that is capable of distorting the price of oil and macroeconomic stability of the entire globe.