Do energy price variations impact the volatility of inflation expectations?
Files
Master's Thesis Lucas Dupuis & Pierre Houssière.pdf
Open access - Adobe PDF
- 2.21 MB
Details
- Supervisors
- Faculty
- Degree label
- Abstract
- As volatility becomes a structural feature of modern economies, uncertainty affects actors at every level, from policymakers to businesses and households. Anticipating macroeconomic risks has thus become a cornerstone of informed decision-making (Adrian et al., 2019; Furno and Giannone, 2024). This master’s thesis investigates whether fluctuations in WTI crude-oil improve rolling-window, one-day-ahead forecasts of the variance of 10-year breakeven inflation rate daily change. Using daily series from the St. Louis Fed, we estimate ARMA-GARCH models with five innovation structures (ARMA(1,1)-GARCH(1,1) model compared with its longer-memory variants ARMA(1,2)-GARCH(1,2); ARMA(1,1)-GJR-GARCH(1,1); AR(1)-EGARCH(1,1), and MA(1)-EGARCH(1,1)) all with a Student’s t distribution and include energy-price variables in the conditional mean, variance, or both. This study shows that including the log-return of crude oil prices in the model does not lead to a statistically significant reduction in the mean-squared error and the mean average error of variance forecasts, as confirmed by the Diebold-Mariano (Diebold and Mariano, 1995) test.