In search of time-varying jumps during the turmoil periods: Evidence from crude oil futures markets
Abstract
Prior literature demonstrates that energy prices are characterized by time-varying jumps. However, earlier studies do not investigate if the intensity of such jumps appears to be higher amid periods of extreme volatility in comparison to normal periods. Employing the GARCH-jump model, this study examines whether jumps occurring in energy prices are an indicator of market crashes. To serve this purpose, we consider several downturns in oil markets spanning over the last few years. Our empirical analyses reveal that the conditional expected number of jumps in WTI and Brent oil futures prices increases significantly amid the depression periods, which is, however, not the case when the market functions normally. We, therefore, conclude that such clusters of jumps may contain predictive information for oil market crashes and thus provide early signals of future downturns. The findings further show that crude oil volatility, the US equity VIX, and economic policy uncertainty play a significant role in explaining the time-dependent jumps during the turmoil periods. The findings of our research could be useful for investors participating in global crude oil markets and for policymakers watching out for the impact of energy prices on the economy.