Modeling and Forecasting the Volatility of Gasoline Prices Using Symmetric and Asymmetric GARCH Models in Erbil City
DOI:
https://doi.org/10.25212/lfu.qzj.4.2.18Keywords:
Conditional Variance; Volatility Clustering; Symmetric and Asymmetric GARCH Models; Error Distribution; Volatility Forecasting; Root Mean Square Error (RMSE)..Abstract
The paper aims to compare the performance of several univariate symmetric and asymmetric GARCH volatility models in modeling and forecasting the volatility of daily Gasoline prices in Erbil city. This paper chooses the GARCH, GARCH-M, TGARCH, E-GARCH and Power GARCH model to analyze the daily return of Gasoline under three different error distributions: normal distribution, student-t distribution and generalized error distribution and then compare the results and choose the appropriate model to forecast the volatility. The sample is divided into two subsamples. The first subsample is called in-sample data set (Training sample) used to estimate the ARMA-GARCH models for underlying data and the second subsample is called out-sample data set (Testing sample) used to investigate the performance of volatility forecasting. As a result of analyses, we conclude that the best model fits the volatility of Gasoline returns series is AR(2)-Power GARCH(2,1,1) non-linear asymmetric model with innovation student-t distribution (d.f =10), and has better forecasting performance than others models. This result is important in many fields of finance such as investment decisions, asset pricing, portfolio allocation and risk management.
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