Energy Economics 32 (2010) 10011008

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Energy Economics
j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e n e c o

International evidence on crude oil price dynamics: Applications of

ARIMA-GARCH models
Hassan Mohammadi a,, Lixian Su b
a
Department of Economics, Illinois State University, Normal, IL 61790-4200, United States
b
Graduate Student, Department of Economics, Illinois State University, Normal, IL 61790-4200, United States

a r t i c l e i n f o a b s t r a c t

Article history: We examine the usefulness of several ARIMA-GARCH models for modeling and forecasting the conditional
Received 30 October 2009 mean and volatility of weekly crude oil spot prices in eleven international markets over the 1/2/199710/3/
Received in revised form 19 April 2010 2009 period. In particular, we investigate the out-of-sample forecasting performance of four volatility
Accepted 22 April 2010
models GARCH, EGARCH and APARCH and FIGARCH over January 2009 to October 2009. Forecasting
Available online 29 April 2010
results are somewhat mixed, but in most cases, the APARCH model outperforms the others. Also, conditional
Keywords:
standard deviation captures the volatility in oil returns better than the traditional conditional variance.
APARCH Finally, shocks to conditional volatility dissipate at an exponential rate, which is consistent with the
ARIMA covariance-stationary GARCH models than the slow hyperbolic rate implied by the FIGARCH alternative.
EGARCH 2010 Elsevier B.V. All rights reserved.
FIGARCH
Forecasting
GARCH
Crude oil prices

1. Introduction Previous empirical work has examined the stochastic properties of

The past few years have witnessed a renewed interest in modeling
and forecasting crude oil prices and their volatility. A number of factors
may have contributed to that interest. First, such information is useful
for modeling oil price derivatives, forecasting future spot prices,
calculating measures of risk as well as hedging (Hansen and Lunde,
2005). Second, oil price movements appear to have undesired
consequences for the economies of both oil-importing and oil-exporting
countries. A large and growing body of literature has studied the effect of
oil shocks on ination (Rothemberg and Woodford, 1996), output
(Hamilton and Herrera, 2004; Mork, 1989; Ferderer, 1996, Yang et al.,
2002); investment (Bernanke, 1983; Elder and Serletis, 2009);
monetary policy (Bernanke et al., 1997 and commodity prices
(Chaudhuri, 2001). There is also a growing body of literature on
Dutch disease suggesting that high oil prices are associated with high
ination, real exchange rate appreciation, loss of competitiveness, and
decline in manufacturing output and employment in oil-exporting
countries.1 Thus, a better understanding of the dynamics of crude oil
prices and their volatility is useful for energy researchers, market
participants and policy makers.
spot and future crude oil prices using alternative modeling techniques,
data frequencies and scope of investigation. Modeling techniques have
included vector autoregressive models (Mirmirani and Li, 2004),
cointegration and error correction modeling (Mohammadi, 2009),
GARCH (Morana, 2001; Yang et al., 2002; Sadorsky, 2006; Agnolucci,
2009), neural network (Yu et al., 2008), and Jump-diffusion process
(Askari and Krichene, 2008). Data frequency has varied from monthly
(Mohammadi, 2009) to daily (Yu, et al., 2008; Askari and Krichene, 2008;
Kang et al., 2009). Finally, the scope of the analysis has varied from one
market (Askari and Krichene, 2008; Yang et al., 2002), to two (Yu et al.,
2008), and three markets (Kang et al., 2009). Broadly, these results suggest
that oil price series are persistent and contain unit roots. Oil returns have
excess kurtosis, are negatively skewed, and do not follow a Gaussian
distribution. Volatility in oil returns is clustering and persistent, consistent
with predictions of GARCH variety models.
This paper will re-examine the time series properties of crude oil prices
by extending it in three directions. First, it uses weekly crude oil spot price
data over 1/2/199710/3/2009 period for a total of 664 observations,
rather than the monthly or daily data which have been prevalent in
previous studies, thus providing an opportunity to examine the
robustness of previous studies to data frequency.2 Second, it uses price

Corresponding author. Tel.: +1 309 438 7777. 2

E-mail addresses: hmohamma@ilstu.edu (H. Mohammadi), lsu@ilstu.edu (L. Su).
1
Early studies include Bruno and Sachs (1982) and Edwards and Aoki (1983). More
recent research includes Jahan-Parvar and Mohammadi (2008) and Korhonen and
Juurikkala (2009).
We have chosen weekly data for two reasons: rst, it allows us to examine the
robustness of previous studies to alternative data frequencies. Second, we are limited
by the availability of data with other frequencies for such a large number of markets. In
fact, the Energy Information Administration reports daily data for only two markets.
Thus to broaden the scope of the study, we have relied on weekly data.

0140-9883/$ see front matter 2010 Elsevier B.V. All rights reserved.
doi:10.1016/j.eneco.2010.04.009
1002 H. Mohammadi, L. Su / Energy Economics 32 (2010) 10011008

Table 1
Summary statistics for returns to crude oil (weekly data: January 3, 1997October 9, 2009).

Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK US Venezuela

Mean (%) 0.100 0.064 0.087 0.114 0.102 0.105 0.105 0.089 0.099 0.099 0.061
4.706 5.201 4.321 4.183 4.368 4.821 5.664 4.666 5.089 4.628 4.993
Std. dev. (%) 20.568 23.359 15.194 24.007 20.979 20.722 26.101 21.088 25.992 22.666 19.694
Maximum 19.636 26.748 24.889 16.816 25.799 21.339 25.213 17.331 16.164 18.944 22.167
Minimum 0.280 0.573 0.687 0.236 0.518 0.359 0.160 0.362 0.057 0.392 0.620
Skewness 4.332 6.363 6.172 5.867 6.397 4.578 4.894 4.621 4.632 5.018 5.377
Kurtosis 55.019* 332.587* 314.784* 222.453* 332.217* 79.096* 97.193* 82.992* 70.518* 123.470* 189.310*
JargueBera [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Q(36) 73.309* 66. 756* 91.278* 67.360* 74.360* 79.087* 57.778* 67.325* 41.690 75.651* 47.200
[0.000] [0.001] (0.000] [0.000] [0.000] [0.000] [0.012] [0.001] [0.257] [0.000] [0.100]
Q2(36) 92.735* 174.340* 191.000* 115.260* 165.990* 81.550* 122.140* 129.010* 132.100* 130.890* 80.156*
[0.000] [0.000] (0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]

Notes: JarqueBera is the 2statistic for test of normality. Q(36) and Q2(36) are the BoxPierce statistics for serial correlations of up to 36 orders in returns and squared returns series.
Probability values are in brackets. Signicance at the 5% level is given by *.

data from eleven international markets, including both oil-exporting and
oil-importing countries, thus providing an opportunity to evaluate the
behavior of oil prices across a large number of global markets. Third, it
examines the volatility of crude oil returns using four alternative classes of
volatility models (GARCH, EGARCH and APARCH and FIGARCH), and
evaluates their out-of-sample forecasting performance. Within this
framework, it addresses a number of research questions: Do weekly oil
prices exhibit time-varying volatility, and if so, is the pattern similar across
markets? Does volatility respond symmetrically to positive and negative
shocks? What is the evidence of risk-return tradeoff in the oil market?
How persistent are the shocks to conditional volatility? Do they dissipate
at an exponential rate as in covariance-stationary GARCH, EGARCH
and APARCH models, or at a slow hyperbolic rate as in the FIGARCH
model? Finally, how do these models perform in terms of out-of-sample
forecasting?
The remainder of this paper is organized as follows. Section 2 describes
the data and their statistical characteristics. Section 3 discusses the models
and their unique properties. Section 4 presents the empirical results. And
Section 5 concludes.
2. Data
Weekly data on eleven crude oil (FOB) spot prices ($/barrel) covering
January 3, 1997 to February 13, 2009 are obtained from the ofcial website
of the Energy Information Administration (EIA). They include Algeria's
Saharan blend, Canadian Par, China's Daqing, Abu Dhabi's Murban,
Indonesia's Minas, Norway's Blend, Russia's Urals Mediterranean, Saudi
Arabia's Medium, U.K.'s Brent Blend, the U.S.'s weighted average of import
prices, and Venezuela's Tia Juana Light. Thus the data include prices in
both oil-exporting and oil-importing countries as well as OPEC and non-
OPEC members.
An examination of sample autocorrelations, partial autocorrelations, as
well as formal tests of unit roots reveal that the log of crude oil prices are
non-stationary in levels but stationary in rst differences.3 Given the
stationarity requirements of the analysis, we construct measures of crude
oil nominal rate of return (rt), as rt =100 ln(Pt /Pt 1), where Pt and Pt 1
are current and one-period lagged prices.
Table 1 provides descriptive statistics for the return series. The results
are rather similar across markets. Mean returns are quite small, but the
corresponding standard deviations are larger in an order of several
magnitudes. Under the assumption of normality, standard measures of
skewness and kurtosis possess asymptotic distributions of N(0, 6/T) and N
(0, 24/T), respectively, where T(=664) equals the sample size. The
negative values of skewness statistic suggest greater probability of large
decreases in oil returns during the sample period. The high value of
kurtosis statistics suggest that extreme price changes occur more
3 5
The results are available upon request.
frequently. The JarqueBera test statistics reject normality. The Box
Pierce Q statistics do not reject autocorrelations of up to 36 orders in
returns and their squared values. Thus returns are serially correlated and
subject to time-varying volatility.
3. Modeling conditional moments
Modeling crude oil returns and their volatility consists of two steps.
The rst step involves the specication of the ARMA(p, q) model for mean
returns, and diagnostic tests of their residuals. The second step is the
specication of the GARCH (p, q) model for conditional volatility and its
diagnostic tests.
3.1. Conditional mean
Our strategy for modeling the conditional mean is to search over
alternative ARMA(p, q) models by varying p and q parameters from 0 to 3,
and identifying the optimum model using the Schwartz Information
Criterion (SIC). The results of this exercise suggest that oil returns may be
modeled as a MA(1) process. That is,
r1 = 1 + Lt 1
where is the MA(1) parameter, L is the lag operator, and t are
innovations with zero mean but potentially subject to conditional
heteroskedasticty. Thus, given the short memory of the MA(1) process,
the effect of random shocks dissipates after one period.
Table 2 provides the estimation results along with their diagnos-
tics. The estimated values for range from the low of 0.135 for Russia
to high of 0.535 for the U.K., and satisfy the invertibility condition.
Also, the BoxPierce statistics on the standardized residuals, Q(20),
reject the existence of serial correlation of up to twenty orders.4 In
contrast, Engle's (1982) ARCH test rejects the null hypothesis of no
ARCH effect in favor of ARCH(10).5 This implies that returns are
tranquil over some clustered periods and turbulent over others. Thus,
we turn to modeling the conditional variance.
3.2. Conditional variance
We begin with the generalized autoregressive conditional hetero-
skedasticity model, GARCH(1,1) proposed by Bollerslev (1986),
t = zt t
2 2 2
2
t = + t1 + t1
4
Exceptions are Canada and Russia. We attempted to remove serial correlation
using higher order ARMA processes but with no success. Thus we proceed with the
analysis acknowledging this short-coming.
The exception is Venezuela.
 H. Mohammadi, L. Su / Energy Economics 32 (2010) 10011008 1003

Table 2
MA(1) models of weekly crude oil returns (weekly data: January 3, 1997December 27, 2008).

Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

Mean equation
0.026 0.042 0.061 0.036 0.067 0.038 0.038 0.037 0.042 0.041 0.051
(0.101) (0.088) (0.094) (0.082) (0.095) (0.103) (0.111) (0.098) (0.098) (0.096) (0.098)
0.259 0.033 0.363 0.233 0.365 0.296 0.144 0.250 0.139 0.288 0.165
(0.034)* (0.035) (0.029)* (0.033)* (0.030)* (0.033)* (0.034)* (0.034)* (0.034)* (0.034)* (0.034)*

Model diagnostics
Log(L) 1286.79 1333.96 1195.32 1160.38 1203.448 1289.12 1406.17 1273.69 1341.10 1255.75 1313.66
Q(20) 16.649 38.376 13.797 27.202 17.268 27.867 38.289 27.319 27.852 25.583 20.912
[0.614] [0.005]* [0.795] [0.100] [0.572] [0.086] [0.005]* [0.097] [0.086] [(0.142] [0.342]
ARCH(10) 2.742 2.309 9.823 3.947 9.333 2.002 8.635 3.429 7.315 2.619 1.361
[0.003]* [0.012]* [0.000]* [0.000]* [0.000]* [0.031]* [0.000]* [0.000]* [0.000]* [0.004]* [0.195]

Notes: Log(L) is the value of the log likelihood function. Q(20) is the BoxPierce Q statistic for serial correlations in the standardized residuals. ARCH(10) is Engel's LM test of ARCH
effect of up to tenth order. Signicance at the 5% level or better is given by *.

where t are innovations in the mean Eq. (1); 2t is the conditional
variance; zt is a standardized error term; is a constant; 2t 1 is the
news about the volatility from the previous period, and is the ARCH
term; and 2t 1 is the previous period's forecast error variance, and is
the GARCH term. The parameters , , and must be positive;
+ b 1; where + captures the persistence of volatility shocks. As
in Baillie and Bollerslev (1989), we assume that zt follows a skewed
Student-t distribution.6
One potential short-coming of the GARCH model is the assumption
that2t responds symmetrically to the news about volatility from the
previous period. The exponential GARCH (or EGARCH) model
originally proposed by Nelson (1991), and re-expressed in Bollerslev
and Mikkelson (1996) allows for an asymmetric response,


2 1
log t = + 1L 1 + Lg zt1
In order to examine the possibility of tradeoff between risk and
returns, Engle et al. (1987) have introduced the EGARCH-M model by
incorporating the conditional standard deviation into the return equation,
rt
 = 1 + Lt + t
2 1
log t = + 1L 1 + L g zt 5
g zt = 1 zt + 2 jjzt Ejzt j
where captures the effect of conditional volatility on mean returns. If
N 0, then there is a positive tradeoff between risk and return as
suggested by the portfolio theory.
The GARCH and EGARCH models discussed above assume the
conditional variance is a linear function of lagged squared returns.
Ding et al. (1993) have proposed the asymmetric power GARCH (or
APARCH) which is more exible in modeling the conditional variance,
3
and is written as,

where t = + jt1 jt1 + t1 6

g zt = 1 zt + 2 jjzt jEjzt jj 4 where N 0 and 1 b b 1. Depending on the values of and , the

APARCH model includes several other specications as its special cases. In
For 1 b 0 the future conditional variance will increase more in particular, conditional volatility is better modeled in terms of the variance
response to negative shocks than positive shocks of the same magnitude.7 if =2, and in terms of conditional standard deviation if =1.8
The models considered so far assume that conditional variance
follows an exponential rate of decay in response to lagged news about
6
Footnote 9 provides some justications for our choice of standardized skewed volatility. Baillie et al. (1996) have introduced the more exible
Student-t distribution. More information on this distribution as well as others is found fractionally integrated GARCH (FIGARCH) model which allows
in G@RCH 6.0 Help available at http://www.core.ucl.ac.be/~laurent/G@RCH/site/ varying degrees of memory in the conditional volatility. The
default.htm. The log-likelihood function for the distribution is,
FIGARCH(1,d,1) can be written as,
8 0 1 9
>
>   >
>
<
v B 2 C = 2 1 1 d 2
LSkSt = T log
v+1
log 0:5 log v2 + logB C + log s t = 1L + 11L L1L t 7
> 2 2 @ 1A >
>
: + >
;

( "
2
#) where 0 d 1 is the fractional difference parameter, capturing the
T szt + m 2It
0:5 logt2 + 1 + v log 1 + ; persistence of the shock to conditional volatility (or the degree
t =1 v2
memory). Shocks to conditional volatility have a short memory when
where 8 d = 0, and a long memory when d = 1. For 0 b d b 1the model provides
> m
< 1 if zt an intermediate range of persistence so that a shock to the optimal
s
It =
>
: 1 if zt b m : forecast of the future conditional variance dissipates at a slow
s hyperbolic rate.
Here is the asymmetry parameter, v is the degree of freedom of the distribution,
  4. Empirical results
v + 1 p
v2

2

m= p v
1 ;

This section reports the results of estimating the parameters of the
and 2 conditional mean and variance equations for the GARCH, EGARCH,
r


s= 2 + 12 1 m2 :
APARCH and FIGARCH models represented by Eqs. (1)(7) along with
7
their diagnostic tests. We estimate the models' parameters with
This is known as the leverage effect, and has been found in nancial assets. On the
weekly data from January 2, 1997 to December 27, 2008, and use data
other hand, if N 0 then a positive shock has a larger impact on volatility than negative
shocks of the same magnitude. This inverse leverage effect has been observed in a
8
number of commodity prices including electricity as in Bowden and Payne (2008). For more detail see Ding et al. (1993).
1004 H. Mohammadi, L. Su / Energy Economics 32 (2010) 10011008

Table 3
MA(1)-GARCH(1,1) models of weekly crude oil returns (weekly data: January 3, 1997December 27, 2008).

Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

Mean equation
0.091 0.087 0.099 0.115 0.102 0.085 0.110 0.102 0.124 0.083 0.085
(0.095) (0.087) (0.085) (0.073) (0.089) (0.099) (0.101) (0.093) (0.094) (0.096) (0.097)
0.280 0.067 0.340 (0.249) 0.341 0.303 0.166 0.248 0.164 0.294 0.181
(0.045)* (0.044) (0.042)* (0.045)* (0.043)* (0.048)* (0.041)* (0.044)* (0.041)* (0.042)* (0.042)*

Variance equation
0.114 0.095 0.316 0.080 0.364 0.103 0.167 0.178 0.116 0.144 0.297
(0.062) (0.064) (0.240) (0.043) (0.292) (0.055) (0.076)* (0.074)* (0.060)* (0.068)* (0.110)*
0.074 0.064 0.106 0.082 0.095 0.064 0.088 0.074 0.073 0.075 0.071
(0.020)* (0.021)* (0.045)* (0.023)* (0.045)* (0.018)* (0.021)* (0.018)* (0.018)* (0.019)* (0.026)*
0.900 0.919 0.780 0.891 0.779 0.912 0.886 0.881 0.903 0.887 0.862
(0.028)* (0.029)* (0.124)* (0.033)* (0.139)* (0.024)* (0.025)* (0.028)* (0.024)* (0.031)* (0.035)*
Asymmetry 0.107 0.102 0.070 0.239 0.064 0.130 0.162 0.208 0.084 0.198 0.101
(0.069) (0.052)* (0.065) (0.074)* (0.057) (0.066)* (0.063)* (0.074)* (0.065) (0.075)* (0.063)
Tail 8.0562 6.738 8.569 9.006 7.319 8.005 10.306 9.223 10.923 9.060 5.886
(2.484)* (1.914)* (2.613)* (2.836)* (2.008)* (2.498)* (3.959)* (3.011)* (4.398)* (3.004)* (1.293)*

Model diagnostics
+ 0.974 0.983 0.886 0.973 0.874 0.976 0.974 0.965 0.976 0.962 0.933
Q(20) 13.539 32.437 12.318 20.235 15.992 19.165 25.416 20.062 20.466 22.858 18.012
[0.810] [0.028]* [0.891] [0.381] [0.658] [0.446] [0.117] [0.391] [0.367] [0.244] [0.522]
ARCH(10) 0.242 0.395 1.011 0.218 1.207 0.293 1.056 0.247 1.586 0.259 0.464
[0.992] [0.949] [0.432] [0.995] [0.283] [0.983] [0.395] [0.991] [0.107] [0.989] [0.913]
Log(L) 1268.05 1315.89 1173.44 1173.44 1185.84 1272.75 1381.52 1258.129 1319.62 1238.485 1304.911

Notes: e2t 1 is the lagged news about volatility; h2t 1is lagged conditional volatility. See also Table (2).

from January 2, 2009 to October 9, 2009 for out-of-sample forecasting in all but the U.K.11 We also fail to reject the null hypothesis of = 1 in
evaluations. Also, as in Baillie and Bollerslev (1989), we assume that zt six markets, but = 2 is rejected only in two markets. Thus, the bulk of
innovations in Eq. (2) follow a skewed Student-t distribution, and evidence favors modeling the conditional standard deviation rather
report the estimates of their asymmetry and tail parameters.9 than the variance. As Ding et al. (1993) have argued, such a nding
Tables 36 report the results. implies a higher correlation between absolute returns than between
Table 3 reports the parameter estimates for the MA(1)-GARCH squared returns, and is consistent with the long memory property
(1,1) model. Overall, the model performs well. Estimates of , the observed in high frequency nancial data.
coefcient of the MA(1) process for conditional mean is in the range of Finally, Table 6 reports the estimates of parameters for the MA(1)
0.067 for Canada to 0.341 for Indonesia, and are statistically signicant FIGARCH(1,d,1). The estimates of d, the fractional integration parameter,
for all but Canada. The estimates of and are signicant, and + are signicantly different from zero and one in only two markets Dubai
ranges from the low of 0.874 for Indonesia to the high of 0.976 for and the U.S. As for these two markets, the estimate of the autoregressive
Norway and the U.K., indicating high persistence in the conditional conditional variance parameter, , is insignicant only for Dubai. Thus,
volatility. The estimates of asymmetry and tail parameters are support for FIGARCH(1,d,1) is limited only to this market.
signicant, supporting the skewed Student-t distribution for innova-
tions. Also, the diagnostic tests reveal no evidence of serial correlation 5. Forecast evaluation
or ARCH effects in the remaining residuals. The sole exception is
Canada for which serial correlation remains a problem. We evaluate the out-of-sample forecasting performance of the
Table 4 reports the parameter estimates for the MA(1)EGARCH conditional mean and volatility models using their associated root
(1,1) model. The estimates of 1are all negative, and signicantly mean squared error (RMSE) and mean absolute error (MAE). The
different from zero in four markets. Thus, evidence of asymmetric statistics associated with the conditional mean are constructed as,
response to good and bad news appears mixed. Estimates of + range
s
from the low of 0.56 for Norway to the high of 0.97 for Dubai and the U.K.
1 T 2
Thus, allowing for asymmetry tends to reduce the persistence in the RMSE = e
T t =1 t
conditional volatility in several markets. We also examined the
possibility of risk-return tradeoff by estimating the GARCH-M model. s
The estimates of the tradeoff parameter are all insignicant, suggesting 1 T
MAE = je j
lack of such tradeoff.10 T t=1 t
The results of the APARCH model are reported in Table 5. The
estimates of , the power parameter are signicantly different from zero where T is the number of out-of-sample forecast data points, et =ra,t rf,t
is the forecast error, ra,t is the actual return and rf,t is its future forecast.
Similarly, the statistics related to the conditional volatility models are,
9
The empirical analysis is carried out in G@RCH 5.0 software package. The program
allows for four alternative distributions: Gaussian, Student-t, generalized error s
distribution (GED), and skewed Student-t distribution. Our choice of the skewed 1 T
2 2 2

Student-t distribution is motivated by three factors: rst, as several studies (Bollerslev,
RMSE = a;t f ;t
T t=1
1987; Hsieh, 1989; Baillie and Bollerslev, 1989; and Palm and Vlaar, 1997) have
shown, this distribution is more suitable when variables are subject to high observed
kurtosis as is the case for oil returns. Second, the estimated parameters of this 1 T 2 2
MAE = j f ;t j
distribution (reported in Tables 36) are signicant, suggesting the relevance of this T t = 1 a;t
distribution. Third, experimentation with other available distributions does not change
the paper's main conclusions.
10 11
These results are available upon request. The estimates for Venezuela are not available due to lack of convergence.
 H. Mohammadi, L. Su / Energy Economics 32 (2010) 10011008 1005

Table 4
MA(1)EGARCH(1,1) models of weekly crude oil returns (weekly data: January 3, 1997December 27, 2008).

Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

Mean equation
0.016 0.044 0.056 0.045 0.051 0.024 0.040 0.044 0.066 0.026 0.001
(0.092) (0.087 (0.085) (0.085) (0.081) (0.096) (0.101) (6.950) (0.092) (0.095) (0.001)
0.276 0.072 0.345 0.250 0.349 0.294 0.158 0.249 0.155 0.289 0.173
(0.046)* (0.046) (0.042)* (0.044)* (0.051)* (0.046)* (0.043)* (0.042)* (0.043)* (0.039)* (0.015)*

Variance equation
0.663 0.803 0.678 0.413 0.794 0.697 0.707 0.692 0.832 0.514 0.972
(0.39)* (0.0342)* (0.246)* (0.740) (0.194)* (0.392)* (0.504)* (6.648) (0.380)* (0.394)* (0.398)*
0.206 0.238 0.204 0.009 0.308 0.366 0.051 0.004 0.004 0.061 0.064
(0.382) (0.349)* (0.307)* (0.527) (0.402) (0.257) (0.386)* (3.826) (0.536) (0.051) (0.536)*
0.963 0.964 0.937 0.965 0.934 0.964 0.961 0.951 0.963 0.939 0.956
(0.017)* (0.031)* (0.028)* (0.016)* (0.033)* (0.016)* (0.015)* (0.060)* (0.015)* (0.031)* (0.026)*
1 0.094 0.102 0.079 0.074 0.085 0.129 0.118 0.088 0.076 0.061 0.079
(0.051) (0.061) (0.039)* (0.053) (0.039)* (0.059)* (0.050)* (0.324) (0.044) (0.051) (0.052)
2 0.154 0.187 0.198 0.148 0.204 0.161 0.143 0.098 0.126 0.093 0.139
(0.065)* (0.069)* (0.071)* (0.076)* (0.095)* (0.052)* (0.066)* (0.395) (0.072) (0.055) (0.058)*
Asymmetry 0.154 0.138 0.087 0.250 0.083 0.178 0.221 0.231 0.138 0.242 0.139
(0.066)* (0.052)* (0.063) (0.074)* (0.055) (0.063)* (0.065)* (1.055) (0.064)* (0.070)* (0.064)*
Tail 7.944 7.220 9.016 10.279 7.901 8.440 11.590 11.887 12.338 10.465 5.392
(2.264)* (2.024)* (2.855)* (3.599)* (2.315)* (2.540)* (4.385)* (12.517)* (5.147)* (3.739)* (1.127)*

Model diagnostics
+ 0.759 0.726 0.733 0.974 0.626 0.598 0.910 0.947 0.967 0.878 0.892
Q(20) 8.257 29.228 11.142 18.053 14.983 20.302 27.584 21.272 21.201 22.631 14.254
[0.975] [0.062] [0.919] [0.519] [0.724] [0.377] [0.092] [0.322] [0.326] [0.254] [0.769]
ARCH(10) 8.597 0.580 1.097 0.168 1.483 0.225 1.314 0.287 1.841 0.195 0.519
(0.987) [0.831] [0.3662] [0.998] [0.141] [0.994] [.219] [0.984] [0.051] [0.997] [0.877]
Log(L) 1265.48 1315.15 1172.13 1133.93 1185.01 1269.65 1379.14 1253.61 1319.01 1234.09 1297.16

Notes: See Table 3.

where 2a,t and 2f,t are the realized and forecasts of volatility respectively.
As a general rule, smaller forecast error statistics imply superior
forecasting ability.
Tables 7 and 8 eport the results with data from January 3 to
October 10, 2009. Table 7 shows the ndings for the conditional mean.
Both RMSE and MAE rank the MA(1)EGARCH(1,1) rst followed by
the MA(1)APARCH(1,1). However, there is no support for the MA
(1)ARCH(1,1) or the FIGARCH(1,d,1). Similarly, Table 8 reports the
forecast evaluations for the conditional variance. Now evidence is
mixed. The MAE criterion typically favors the MA(1)EGARCH(1,1)

Table 5
MA(1)APARCH(1,1) models of weekly crude oil returns ((weekly data: January 3, 1997December 27, 2008).

Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

Mean equation
0.022 0.063 0.072 0.071 0.075 0.015 0.055 0.046 0.091 0.035
(0.098) (0.085) (0.085) (0.071) (0.089) (0.099) (0.099) (0.092) (0.089) (0.093)
0.276 0.062 0.342 0.256 0.337 0.297 0.155 0.248 0.151 0.288
(0.046)* (0.046) (0.041)* (0.044)* (0.043)* (0.046)* (0.043)* (0.041)* (0.043)* (0.040)*

Variance equation
0.089 0.070 0.209 0.067 0.261 0.083 0.317 0.117 0.172 0.130
(0.053) (0.071) (0.154) (0.030)* (0.223) (0.053) (0.545) (0.051)* (0.396) (0.069)
0.071 0.072 0.074 0.071 0.063 0.063 0.066 0.052 0.067 0.067
(0.018)* (0.025)* (0.033)* (0.017)* (0.031)* (0.016)* (0.033)* (0.011)* (0.028)* (0.016)*
0.904 0.916 0.900 0.904 0.836 0.912 0.870 0.901 0.889 0.882
(0.029)* (0.042)* (0.067)* (0.022)* (0.079)* (0.030)* (0.051)* (0.025)* (0.070)* (0.036)*
0.550 0.439 0.359 0.500 0.358 0.753 0.329 0.831 0.329 0.679
(0.339) (0.262) (0.235) (0.230) (0.335) (0.384)* (0.355) (0.361)* (0.449) (0.290)*
1.206 1.202 1.757 1.273 1.911 1.069 2.432 1.229 2.010 1.255
(0.475)* (0.475)* (0.599)* (0.324)* (0.793)* (0.400)* (1.930) (0.345)* (2.670) (0.311)*
Asymmetry 0.146 0.121 0.072 0.244 0.073 0.174 0.199 0.227 0.108 0.234
(0.069)* (0.052)* (0.064) (0.075)* (0.056) (0.066)* (0.067)* (0.068)* (0.066)* (0.072)*
Tail 7.838 7.268 8.788 10.152 7.677 10.628 7.838 11.198 11.343 10.223
(2.301)* (2.184)* (2.796)* (3.531)* (2.234)* (4.152)* (2.301)* (4.067)* (4.829)* (3.616)*

Model diagnostics
+ 0.975 0.986 0.974 0.975 0.899 0.975 0.916 0.953 0.956 0.949
LBQ(20) 14.523 29.935 11.686 19.296 16.060 21.554 26.241 21.614 21.047 22.895
[0.752] [0.053] [0.899] [0.438] [0.653] [0.307] [0.119] [0.304] [0.334] [0.242]
ARCH(10) 0.371 0.514 0.864 0.217 1.076 1.137 0.158 0.278 1.783 0.234
[0.959] [0.881] [0.567] [0.995] [0.379] [0.332] [0.043]* [0.986] [0.061] [0.993]
Log(L) 1265.07 1314.04 1171.49 1133.20 1184.31 1269.46 1378.41 1252.89 1317.73 1234.03

Notes: stands for not available due to lack of convergence. is the (inverse) leverage effect parameter; is the PARCH parameter. + captures the persistence of the volatility
shocks on conditional variance. Estimates for Venezuela are nor reported due to convergence problems. See also Table 3.
1006 H. Mohammadi, L. Su / Energy Economics 32 (2010) 10011008

Table 6
MA(1)-FIGARCH(1,d,1) models of weekly crude oil returns (weekly data: January 3, 1997December 27, 2008).

Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

Mean equation
0.106 0.088 0.099 0.111 0.101 0.103 0.107 0.086 0.126 0.085 0.072
(0.100) (0.091) (0.084) (0.073) (0.089) (0.104) (0.102) (0.101) (0.095) (0.093) (0.008)
0.279 0.068 0.339 0.249 0.343 0.299 0.166 0.249 0.161 0.288 0.180
(0.046)* (0.045) (0.042)* (0.045)* (0.044)* (0.048)* (0.041)* (0.045)* (0.040)* (0.039)* (0.041)*

Variance equation
0.151 0.163 0.384 0.096 0.314 0.149 0.149 0.229 0.104 0.912 0.324
(0.159) (0.342) (0.562) (0.064) (0.465) (0.137) (0.162) (0.241) (0.089) (0.366)* (0.559)*
d 0.425 0.517 0.028 0.527 0.019 0.384 0.605 0.424 0.567 0.259 0.344
(0.285) (0.696) (0.155) (0.202)* (0.125) (0.211) (0.658) (0.283) (0.334) (0.065)* (0.444)
0.406 0.273 0.886 0.208 0.877 0.488 0.226 0.217 0.288 0.416 0.357
(0.212)* (0.233) (0.079)* (0.116) (0.108)* (0.192)* (0.342) (0.122) (0.217) (0.181)* (0.213)
0.703 0.716 0.759 0.676 0.796 0.738 0.732 0.595 0.759 1.174 0.629
(0.179)* (0.480) (0.198)* (0.137)* (0.196)* (0.124)* (0.339) (0.253)* (0.146)* (0.183) (0.270)*
Asymmetry 0.101 0.098 0.068 0.243 0.065 0.126 0.159 0.214 0.077 0.216 0.107
(0.068)* (0.053) (0.066) (0.074)* (0.058) (0.063)* (0.063)* (0.077) (0.065)* (0.073)* (0.066)
Tail 8.167 6.513 8.617 8.780 7.294 8.291 10.262 8.640 11.548 9.451 5.720
(2.616)* (1.944)* (2.642)* (2.755)* (2.005)* (2.716)* (4.522)* (2.797)* (5.242)* (3.039)* (1.473)*

Model diagnostics
LBQ(20) 13.883 32.544 12.346 20.346 15.986 19.924 24.628 19.175 27.664 22.801 18.333
[0.790] [0.027]* [0.870] [0.374] [0.658] [0.399] [0.173] [0.445] [0.067] [0.246] [0.500]
ARCH(10) 0.218 0.403 1.020 0.188 1.197 0.214 0.941 0.233 1.305 0.298 0.333
[0.995] [0.946] [0.424] [0.997] [0.289] [0.995] [0.494] [0.993] [0.229] [0.982] [0.972]
Log(L) 1268.88 1316.72 1173.42 1136.76 1185.83 1273.47 1382.19 1259.23 1319.75 1237.71 1305.97

Notes: d is the fractional difference parameter. See Table 3.

Table 7
Out-of-sample forecast evaluation statistics for the conditional mean models (January 2,2009October 9, 2010).

Model Criteria Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

MA(1)GARCH(1,1) RMSE 3.729 6.333 3.174 3.867 4.048 3.930 4.546 4.012 4.717 4.307 4.638
MAE 2.542 4.928 2.588 2.772 3.004 3.000 3.044 2.935 3.453 3.011 3.792
MA(1)EGARCH(1,1) RMSE 3.724 6.325 3.171 3.865 4.042 3.926 4.540 4.006 4.710 4.309 4.641
MAE 2.557 4.927 2.581 2.743 2.994 2.986 3.030 2.926 3.430 3.002 3.793
MA(1)APARCH(1,1) RMSE 3.724 6.333 3.172 3.867 4.045 3.926 4.541 4.005 4.713 4.309 Na
MAE 2.556 4.930 2.584 2.750 2.998 2.984 3.033 2.925 3.440 3.004 Na
MA(1)FIGARCH(1,d,1) RMSE 3.729 6.333 3.174 3.866 4.048 3.931 4.546 4.010 4.717 4.306 4.638
MAE 2.539 4.928 2.589 2.769 3.003 3.007 3.043 2.933 3.454 3.013 3.792

Notes: RMSE is the root mean squared error; MAE is the mean absolute error. Lowest values for the statistics are denoted in bold face.

while the RMSE prefers the MA(1)APARCH(1,1). Again, there is no
support for the GARCH and FIGARCH models.
The RMSE and MAE statistics allow one to sort among models based
on their out-of-sample forecasting accuracy. However, they do not
formally test whether improvements in forecast accuracy between two
models are statistically signicant. To address this issue we apply the test
statistic proposed by Diebold and Mariano (1995) and Diebold (2007).
More formally, let e1t and e2tt=1,...n denote forecast errors from two
competing models, and g(e1t) and g(e2t) represent their associated
loss functions. Also let dt = g(e1t) g(e2t). As Diebold (2007), pp.
262268 shows,
p
 
n d N0; f ;
where d is the sample mean loss differential, and and f are the
corresponding mean and variance in population. Under the null
hypothesis of zero mean loss differential ( = 0), the standardized
sample mean loss differential has a standard normal distribution,

d
B = r N0; 1
^f
n
where f is a consistent estimator of f. In practice, B is the Student-t
statistic for the hypothesis of zero population mean loss differential. It
is obtained by regressing the loss differential series on an intercept
and correcting for serial correlation using the Newey and West (1987)

Table 8
Out-of-sample forecast evaluation for conditional variance (January 2, 2009October 10, 2009).

Model Criteria Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

MA(1)-GARCH(1,1) RMSE 23.56 55.45 14.23 28.63 26.96 24.48 39.42 24.20 39.80 32.79 28.69
MAE 13.36 36.74 8.14 13.26 15.74 13.49 20.75 13.78 20.53 19.02 17.89
MA(1)-EGARCH(1,1) RMSE 23.03 54.07 13.69 28.49 26.21 23.98 38.91 23.93 39.32 32.43 26.77
MAE 13.24 36.76 9.63 11.97 15.04 12.85 21.96 13.08 19.99 18.49 16.80
MA(1)-APARCH(1,1) RMSE 23.16 52.53 13.53 28.42 26.35 23.25 38.48 23.92 38.82 31.44 Na
MAE 14.86 35.54 7.78 15.19 15.37 14.62 24.64 14.15 21,25 21.13 Na
MA(1)-FIGARCH(1,d,1) RMSE 23.68 54.91 14.27 28.54 26.94 24.80 39.26 24.09 39.64 33.40 28.40
MAE 13.06 36.66 8.17 13.59 15.74 13.52 21.00 14.01 20.61 18.79 17.76

Notes: See Table 7.

 H. Mohammadi, L. Su / Energy Economics 32 (2010) 10011008 1007

Table 9
DieboldMariano (DM) test statistic for forecast accuracy of conditional variance: EGARH versus GARCH, APARCH, FIGARCH.

Model Criteria Algeria Canada China Dubai Indonesia Norway Russia S. Arabia UK USA Venezuela

A. EGARH versus GARCH, APARCH, FIGARCH

MA(1)-GARCH(1,1) MSE 3.21 3.67 15.70 5.55 0.85 6.06 3.29 2.97 2.62 0.46 5.39
MAE 2.82 17.50 58.43 9.96 9.97 24.11 17.74 13.84 22.48 14.58 40.62
MA(1)-EGARCH(1,1) MSE
MAE
MA(1)-APARCH(1,1) MSE 4.62 12.39 9.03 11.61 0.93 11.86 6.65 12.55 8.25 13.86
MAE 10.82 1.45 9.53 7.18 6.03 3.00 6.01 3.71 1.18 5.86
MA(1)-FIGARCH(1,d,1) MSE 11.32 4.68 24.32 9.08 0.74 5.66 5.80 6.79 1.86 0.82 3.81
MAE 1.74 4.29 19.43 1.12 8.03 12.56 3.21 2.28 6.25 5.32 10.46

APARCH versus GARCH, EGARCH, FIGARCH

MA(1)-GARCH(1,1) MSE 25.71 92.59 15.46 9.05 72.63 29.42 6.46 10.81 14.60 19.32
MAE 4.35 36.20 76.67 0.28 146.20 3.31 5.96 3.26 25.40 0.36
MA(1)-EGARCH(1,1) MSE 10.82 12.39 9.03 11.61 0.93 11.86 6.65 12.55 8.25 13.88
MAE 4.62 1.46 9.53 7.18 6.03 3.01 6.01 3.71 1.18 5.87
MA(1)-APARCH(1,1) MSE
MAE
MA(1)-FIGARCH(1,d,1) MSE 40.39 29.85 56.88 7.75 145.06 38.57 6.25 4.61 7.30 41.92
MAE 4.59 55.56 33.18 63.83 58.07 58.63 114.16 46.68 82.34 56.56
Notes: Signicant at 5% level or better. The statistics for Venezuela are missing due to convergence problems.

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