Modelling asymmetric volatility in oil prices under structural breaks

This paper shows that accounting for endogenously determined structural breaks within an asymmetric GARCH model reduces volatility persistence in oil prices. More importantly, we find that both good and bad news have significantly more impact on volatility if structural breaks are accounted for in a model. Thus, previous studies have significantly underestimated the impact of news on volatility as they have inadvertently ignored these structural breaks in volatility. Our empirical results suggest that it is best to include both asymmetric effects and structural breaks in a GARCH model to accurately estimate oil price volatility dynamics. Our results have important practical implications not only for option valuation and hedging decisions but also have major consequences for broader financial markets, the energy industry, and the overall economy. •We show that accounting for structural breaks within an asymmetric GARCH model reduces volatility persistence in oil prices•We find that both good and bad news have significantly more impact on volatility if structural breaks are incorporated•It is best to include both asymmetric effects and structural breaks in a model to accurately estimate oil price volatility•Our results have important practical implications for financial markets, the energy industry, and the overall economy