Volatility modeling of the natural gas and oil prices under the presence of structural breaks

Today, the volatility in crude oil and natural gas prices continues to be one of the most important developments in the financial markets and energy sector, which are followed with increasing curiosity. A possible increases in oil and natural gas prices is vital for developing countries such as Turkey which meets 40% of the energy consumed from oil while importing 90% of oil and 98% natural gas that it consumes. The purpose of this study is to model the volatility of daily return series of crude oil barrel price and natural gas price, which is of great importance for economies, and to estimate the risk and uncertainty by examining the structure, size and continuity of these volatilities. The study is important in terms of investigating the volatility continuity under the presence of structural breaks as well as many studies investigating the volatility of oil and natural gas prices, ie the effects of shocks on the model. Volatility in crude oil series and natural gas series for January 2006 - December 2018 period is estimated by using Generalized Autoregregressive Conditional Variant Variance (GARCH), Exponential Generalized Autoregregressive Variable Variance (EGARCH) and Generalized Asymmetric Exponential ARCH (APGARCH). In order to determine the effects of structural breaks on the persistency of volatility during this study, structural breaks in the variance were determined with the ICSS (Iterative Cumulative Sums of Squares) algorithm and a new EGARCH model was created which was added to the EGARCH model as dummy variables and then breaks were taken into consideration. In the context of these breakdowns, it has been tried to predict which models have more successful and consistent results in modeling and estimating volatility. According to the results of the analysis, it was determined that the volatility dynamics were calculated more accurately and consistently and the retention of volatility decreased with the addition of structural breaks in the variance. The result of the analysis obtained is an important result that can give direction to investors about the approach to risk.