Reexamining the Volume-Volatility Nexus for Crude Oil Markets Under Structural Breaks : An Implication for Forecasting

In this paper, we examine the relationship between volume and volatility for crude oil markets in the context of Mixture of Distribution Hypothesis (MDH). We find that there exists a positive and significant relationship between volume and volatility in case of WTI Crude oil, supporting the MDH. However, similar inferences cannot be drawn for Brent. Further, we also find a negligible drop in the persistence of volatility even in the presence of volume, thereby refuting the claims of MDH. Both for Brent and WTI, with the inclusion of volume as a predictor, the volatility estimates improve significantly especially when the conditional distributions of the residuals are modelled using fat-tailed distributions i.e., skewed student’s t and Johnson’s Su distribution. Our results are robust to the sample used i.e., results are consistent across different periods and also the forecasting horizon. This is important for the market participants and institutions involved in hedging and other risk management practices. This finding also has key implications for regulators