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Motivational Mathematics (skip) Data Information Graphing prices Motivation for my research

Motivational Mathematics (skip) Data Information Graphing prices Motivation for my research Correlation in stock prices Correlation in jumps 11/21/2006 Example Regression on Z-stats CVX OLS Probit Oil Intro. - r t,j is log return, M is total # of observations per day.

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Motivational Mathematics (skip) Data Information Graphing prices Motivation for my research

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  1. Motivational Mathematics (skip) • Data Information • Graphing prices • Motivation for my research • Correlation in stock prices • Correlation in jumps • 11/21/2006 Example • Regression on Z-stats CVX • OLS • Probit • Oil Intro

  2. -rt,j is log return, M is total # of observations per day • Realized Variance • Realized Bi-Power Variation

  3. Sampled at the 5-minute frequency • Sampled from 9/3/2002 to 1/24/2008 for 1343 total observed days • Oil futures data at the 5-min frequency, from 1987 • Changing observations per day • Ticker Symbols • XOM—Exxon Mobile • CVX—Chevron Oil • COP—Conoco Phillips

  4. XOM:29 CVX:41 COP:38

  5. -Correlation between 5-minute prices -XOM had 29 jumps out of 1343 days observed; 6 of which were shared by either CVX or COP -CVX had 41 jumps out of 1343 days observed; 4 of which were shared by either XOM or COP -COP had 38 jumps out of 1343 days observed; 6 of which were shared by either CVX or XOM

  6. -1/13/2003: XOM and CVX -8/12/2003: CVX and COP -9/23/2003: CVX and COP -3/1/2004: XOM and COP -3/5/2004: XOM and CVX -9/14/2004: CVX and COP -9/20/2004: XOM and COP From 9/2/2004 to 9/29/2004: 1 XOM jump, 4 CVX jumps, 3 COP jumps -11/21/2006: XOM and COP, with CVX on 11/22/2006 -From 10/4/2004 to 10/29/2004: 3 XOM jumps, 2 CVX jumps, 2 COP jumps (none on the same day)

  7. -XOM and COP experience price jumps on Tuesday 11/21, with CVX jumping on Wednesday 11/22 -Possible reasons: -On Tuesday, Trans-Alaska pipeline slowed to 25% of normal 800,000 barrel-a-day capacity due to heavy winds -Traders worried about shutdowns at XOM’s Baytown, TX refinery— America’s biggest at 500,000 barrels-a-day -Traders looking to clear up books before Thanksgiving holiday on Thursday -On Wednesday, U.S. Energy Dept releases the information that crude oil inventories swelled by 5.1 million barrels last week -Gunmen in Nigeria seized seven hostages from an Italian supply vessel outside the delta on Wednesday -Price of oil climbs nearly $1 on Tuesday and $.93 on Wednesday

  8. OLS: ZCVX=.253207*ZXOM + .13269*ZCOP + .29 +ei

  9. -Conclusion: We cannot use the results from a Probit model using only dummy variables indicating whether or not a jump occurs.

  10. Probit: Pr(ZCVX>3.09)=Φ(.096*ZCOP + .16491*ZXOM – 2.05) Example: Let ZCOP=mean(ZCOP)~.4849, -if ZXOM increases from 0 to 1, then Pr(ZCVX>3.09) increases by ~10%

  11. Using Crude Oil Futures to check for correlation, checking for co-jumps, introduce into probit model • More familiarity with the practices of the oil industry, especially their trading desk operation to determine how they deal with oil price volatility • Can we use the implied volatility of same industry companies and oil futures to forecast volatility using the HAR-RV-CJ model?

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