Forecasting Chinese crude oil futures volatility: New evidence based on dual feature processing of large‐scale variables

Abstract

AbstractThis paper aims to study the volatility forecasting of Chinese crude oil futures from the large‐scale variables perspective by considering both the information on international futures markets volatility and technical indicators of Chinese crude oil futures. We employ the dual feature processing method (LASSO‐PCA) by integrating least absolute shrinkage and selection operator (LASSO) and principal component analysis (PCA) to extract important factors of the large‐scale exogenous variables. Besides the traditional ordinary least squares (OLS) estimation, the nonlinear support vector regression (SVR) approach is employed to integrate with the LASSO‐PCA method. The empirical results show that both the OLS and SVR combined with LASSO‐PCA can improve the forecasting accuracy, especially SVR‐LASSO‐PCA owns the best forecasting performance. The analysis of the selected variables finds international futures volatility is chosen more frequently. These results are further validated through a series of robust experiments. Finally, the time difference between China and the United States is also considered in order to obtain more reasonable out‐of‐sample forecasting.