Abstract: Crude oil being the main source of energy in Kenya, oil investors and policymakers would benefit greatly if they understand the behaviors of the oil imports and how it affects the Kenyan oil market. This is because oil import prices experience serious fluctuations, making the Kenyan oil market unstable and exposing it to great risks. The objective of this study is to model the risk of the daily crude oil import prices in Kenya from 2005 to 2018. To model the oil price volatility, several heteroscedastic models were fitted and their AICS compared. The EVT approach is also employed in determining the VaR and CTE. The results of this study reveal that the returns are stationary, non-normal and presence of ARCH effects whicht justified the application of the ARCH models. This paper adopted EGARCH(2,1) model as the best to model the volatility. EGARCH (2,1) results indicated the presence of asymmetric effects that can be attributed to leverage effects. Secondly, there was a clear indication of volatility persistence. Point estimates of extreme tail risk measure were estimated at sufficiently high probability levels 99.9%, 99.5% and 99%. The Value-at-Risk gave quantitative information for the extent of potential extreme risks in oil market and the CTE gave a measure of the extra capital an investor should have incase this VaR is exceeded.
Keywords: EGARCH, Volatility persistence, Asymmetric effects, Value-at-Risk, Conditional Tail Expectation.
Title: Modeling the Risk of Crude Oil Import Prices in Kenya
Author: Euchabeth Musenya Muvengei, Proffesor Anthony Gichuhi Waititu, Dr.Joseph Mungatu
International Journal of Mathematics and Physical Sciences Research
ISSN 2348-5736 (Online)
Research Publish Journals
