() and Paolo Zagaglia
Massimiliano Marzo: Department of Economics, Universit`a di Bologna, Postal: Department of Economics, Universit`a di Bologna, Piazza Scaravilli 2, 40126 Bologna, Italy, , Johns Hopkins University, SAIS-BC.
Paolo Zagaglia: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Abstract: This paper studies the forecasting properties of linear GARCH models for closing-day futures prices on crude oil, first position, traded in the New York Mercantile Exchange from January 1995 to November 2005. In order to account for fat tails in the empirical distribution of the series, we compare models based on the normal, Student’s t and Generalized Exponential distribution. We focus on out-of-sample predictability by ranking the models according to a large array of statistical loss functions. The results from the tests for predictive ability show that the GARCH-G model fares best for short horizons from one to three days ahead. For horizons from one week ahead, no superior model can be identified. We also consider out-of-sample loss functions based on Value-at-Risk that mimic portfolio managers and regulators’ preferences. EGARCH models display the best performance in this case.
33 pages, June 21, 2007
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