Calculation of Crude Oil Price Risk Using HM-GARCH and MRS-GARCH Model

Abstract

Crude oil is the main source of energy and accounts for about a third of world energy production. Turmoil in this market will have far-reaching economic and financial consequences. Because of this, investors attach great importance to predicting volatility when investing in crude oil markets to hedge risk and portfolio diversification. However, their investment strategies are often strongly influenced by volatility because, in different periods of crude oil markets, there are high and low fluctuations that are attributed to the movement of economic cycles. Accordingly, the present study compares the Markov Regime Switching (MRS) and Hidden Markov (HM) volatility models with the GJR-GARCH asymmetric model on their forecasting capabilities in the WTI and Brent crude oil markets. Empirical results show that the MRS-GJRGARCH model performs better than the HM_GJRGARCH model in predicting volatility in both markets. Accordingly, using the two criteria of value at risk and the expected deficit, the minimum loss and the expected loss for December 2021 were predicted. The results show that the expected shortfall from investing in the WTI market is greater than the Brent oil market

Keywords

• crude oil
• volatility forecast
• market risk
• hm-gjrgarch