Comparative Volatility Dynamics of Crude Oil and Gold: A GARCH-X vs. GARCH-MIDAS Approach Across Short-, Medium- and Long-Term Horizons

Music City Center 

This study examines the volatility dynamics between crude oil and gold returns using the GARCH-MIDAS framework, which combines mixed-frequency data to capture both short- and long-term volatility. Though these commodities are key hedges against inflation and uncertainty, their interlinked volatility over time is not fully understood. We apply GARCH-MIDAS and compare it to the traditional GARCH-X model to assess how macroeconomic and market factors influence volatility over quarterly, semi-annual, and annual horizons. Using data from 1980 to 2024, we find that GARCH-MIDAS outperforms GARCH-X, reducing mean absolute errors by 40–60%. Gold plays a critical exogenous role in forecasting crude oil volatility, with its influence varying across forecast periods. Our analysis includes recent disruptions like COVID-19, offering fresh insights into changing volatility patterns. This research advances the literature on cross-commodity volatility and introduces a robust framework for mixed-frequency volatility forecasting.