Título:

A Test of Using Markov-Switching GARCH Models in Oil and Natural Gas Trading

2019

2019

Autor (es):

De la Torre-Torres, Oscar V.;
Galeana-Figueroa, Evaristo &
Álvarez-García, José

Revista:

Energies

Volumen:

13

​Número:

1

DOI/URL:

Páginas:

129-153

Palabras clave:

Markov-switching; Markov-switching GARCH; energy futures; commodities; portfolio management; active investment; diversification; institutional investors; energy price hedging

Resumen:

In this paper, we test the use of Markov-switching (MS) GARCH (MSGARCH) models for trading either oil or natural gas futures. Using weekly data from 7 January 1994 to 31 May 2019, we tested the next trading rule: to invest in the simulated commodity if the investor expects to be in the low-volatility regime at t + 1 or to otherwise hold the risk-free asset. Assumptions for our simulations included the following: (1) we assumed that the investors trade in a homogeneous (Gaussian or t-Student) two regime context and (2) the investor used a time-fixed, ARCH, or GARCH variance in each regime. Our results suggest that the use of the MS Gaussian model, with time-fixed variance, leads to the best performance in the oil market. For the case of natural gas, we found no benefit of using our trading rule against a buy-and-hold strategy in the three-month U.S. Treasury bills.

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