Zhuo Huang, Fang Liang, Chen Tong, and Xiaoyong Cui*
This paper studies the volatility spillover effect along the crude oil forward curve. Using the high-frequency prices of futures contracts with different maturities, we assess the additional power of the realized volatilities (RV) of nearby contracts for forecasting the RV of distant contracts. To achieve this, we include the lagged RV of contracts with a different maturity as additional forecasting variables in the HAR model (Corsi, 2009). We find that the daily RV of nearby contracts has more power for forecasting the daily RV of distant contracts than the lagged daily RV of the distant contracts. The forecasting performance also improves significantly after including the RV of the front contracts in the model. Conversely, the RVs of three-month contracts provide little additional information for forecasting the RVs of the front contracts. The results of the Granger causality tests support the volatility spillover effects among contracts along the crude oil forward curve, and the direction of the volatility spillover is only from nearby to distant maturities contracts.
Keywords: volatility spillover, the HAR (heterogeneous autoregressive) model, realized volatility, forward curve, crude oil futures
* Zhuo Huang, Fang Liang, and Chen Tong are at the National School of Development, Peking University, Beijing, China. Xiaoyong Cui is at the School of Economics, Peking University, Beijing, China. Zhuo Huang acknowledges financial support from the Fund of the National Natural Science Foundation o China (71671004).