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Risk assessment of oil price from static and dynamic modelling approaches

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Authors

  • Zhi-Fu Mi
  • Yi-Ming Wei
  • Bao-Jun Tang
  • Rong-Gang Cong
  • Hao Yu
  • Hong Cao
  • Dabo Guan

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Abstract

The price gap between West Texas Intermediate (WTI) and Brent crude oil markets has been completely changed in the past several years. The price of WTI was always a little larger than that of Brent for a long time. However, the price of WTI has been surpassed by that of Brent since 2011. The new market circumstances and volatility of oil price require a comprehensive re-estimation of risk. Therefore, this study aims to explore an integrated approach to assess the price risk in the two crude oil markets through the value at risk (VaR) model. The VaR is estimated by the extreme value theory (EVT) and GARCH model on the basis of generalized error distribution (GED). The results show that EVT is a powerful approach to capture the risk in the oil markets. On the contrary, the traditional variance–covariance (VC) and Monte Carlo (MC) approaches tend to overestimate risk when the confidence level is 95%, but underestimate risk at the confidence level of 99%. The VaR of WTI returns is larger than that of Brent returns at identical confidence levels. Moreover, the GED-GARCH model can estimate the downside dynamic VaR accurately for WTI and Brent oil returns.

Details

Original languageEnglish
Pages (from-to)929-939
JournalApplied Economics
Volume49
Issue number9
Early online date14 Jul 2016
DOIs
Publication statusPublished - 2017
Peer-reviewedYes

Keywords

    Research areas

  • Value at risk, GED-GARCH, extreme value theory, risk quantification, oil markets, C13, G32, Q40

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