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Modeling jumps in organization of petroleum exporting countries basket price using generalized autoregressive heteroscedasticity and conditional jump


Mohsen Bahramgiri
Assistant Professor, School of Management and Economics, Sharif University of Technology, Tehran, Iran
,
Shahabeddin Gharaati
Sharif University of Technology, Tehran, Iran
,
Iman Dolatabadi
Sharif University of Technology, Tehran, Iran
. (2016).


doi: http://dx.doi.org/10.21511/imfi.13(4-1).2016.05

Abstract
This paper uses autoregressive jump intensity (ARJI) model to show that the oil price has both GARCH and conditional jump component. In fact, the distribution of oil prices is not normal, and oil price returns have conditional heteroskedasticity. Here the authors compare constant jump intensity with the dynamic jump intensity and evidences demonstrate that oil price returns have dynamic jump intensity. Therefore, there is strong evidence of time varying jump intensity Generalized Autoregressive Heteroscedasticity (GARCH) behavior in the oil price returns. The findings have several implications: first, it shows that oil price is highly sensitive to news, and it does settle around a trend in long-run. Second, the model separates variances of high volatilities from smooth volatilities. Third, the model rejects an optimal path for extracting oil and technology transmission. In fact, the lack of a long-term pattern can cause excessive oil extracting which can result in heavy climatic effects.

Keywords: generalized autoregressive heteroscedasticity (GARCH), jumps, basket, oil price, Organization of Petroleum Exporting Countries (OPEC), Autoregre-ssive jump intensity (ARJI).
JEL Classification: C32, C52, F31.