Structural Change in the Crude Oil Price Dynamic: Theoretical Study and Practical Implications

Abstract

As many researchers know, the price of oil was affected by a structural change, which we analyzed. We obtained the result of the Chow test (determining the date when the structural break occurred). We observed that important data such as the variance or the VAR vary significantly depending on the period that the data are taken from, with huge implications in the financial world. If an investor wanted to create a portfolio, selecting an inadequate variance and VAR could lead to erroneous results. If an investor creates a portfolio composed of certain assets and assumes a volatility of 20%, and volatility is actually 30%, the actual results could vary materially from those expected. In this study, we observed that the variance is generally higher after the structural change in oil and for oil companies.