Volatility Analysis On Domestic And International Oil Returns

Oil is one of the most important chemical and strategic materials in the world. It isused in various fields of production and life and has a great impact on the developmentof all the countries. However, with the rapid development of modern industry, countriesare all facing up with the problems of the energy scarcity in different degree. In this way,oil is not only the general merchandise, but also the merchandise with political attribute,playing a decisive role in the global politics, economy and military patterns. What’smore, with the rapid development of the financial market and the introduction ofdifferent derivatives, the oil market has a closer and closer relationship with thefinancial market. It has become the merchandise with commodity, political and financialproperty together. There are many factors that bring oil price big volatility. Our countryis one of the biggest oil importing countries. Our oil consumption relies on the importslargely while we can say little about the price but to accept it only. The volatility ofinternational oil price will certainly translate to domestic market, causing greatinfluences to our economy. Thus the research on the volatility of oil price return homeand abroad will contribute greatly to market risk supervision.Volatility refers to the unexpected price changes in trends or the probabilitydistribution of income. In the past financial study based on the Efficient MarketHypothesis, volatility is usually assumed to be some kind of a fixed form (e.g.: thevariance of the rate of return is fixed.) However, researchers find the volatility of returnseries appears to be clustered and provides a high level volatility persistence. Thusdifferent volatility models are introduced, including the class of GARCH and stochasticvolatility models mainly.The thesis combines qualitative analysis and empirical study, analyzing thecharacteristics of volatility of oil price return home and abroad. The thesis is dividedinto five chapters: The first chapter is going to talk about the general idea of the paper,the purpose and significance of the research, major contents of the research, the presentresearch status at home and abroad, and major research methods. The second chapter isthe theoretical basis, which concludes the characteristic of volatility of the financialmarket, the models and some relative methods and theories used in the paper. The thirdchapter is the qualitative analysis of the characteristic of volatility of oil home and abroad, including the strategic position, the triple nature of oil and the specific analysisof fluctuation of oil prices in recent three years after financial crisis. The fourth chapteris the key part of this paper, it discusses the characteristics of volatility learned by theclass of GARCH and SV models. What’s more, through prediction and comparison ofthe two based on external data of the sample, the conclusion is drawn in the fifthchapter.The main points of the thesis are as follows: First, the volatility of the oil pricereturn home and abroad shows certain clustering and continuance. The ARCH effectcan be eliminated by the GARCH model. What’s more,the GARCH model works betterunder the assumption of student distribution than the normal distribution or GEDdistribution. Second, there is a strong “leverage effect” in the oil market. The modelwhich can reflect the characteristic will do better in volatility prediction of oil. Third,the oil market shows that the high risk is together with high return. And the SV modelsdo better than the GARCH-M model. Fourth, the SV models are superior in itscomprehensive abilities to GARCH models in the ability of reflecting the volatility ofprice return.