How do OPEC news and structural breaks impact returns and volatility in crude oil markets? Further evidence from a long memory process

- We examine dual long memory properties for both WTI and Brent crude oil markets.
- We discern impacts of OPEC's news announcements on oil returns and volatilities in the presence of long memory.
- There is evidence of long memory in both returns and volatility of oil markets but there are also differences.
- The news announcements have significant but differential impacts on volatility persistence.
- The presence of structural breaks reduces persistence of volatility and leverage effect.

Since its formation, OPEC through its conference decisions has been a major player in the world oil markets. The purpose of this paper is to examine the impacts of OPEC's different news announcements on the conditional expectations and volatility of crude oil markets in the presence of long memory and structural changes. To do so, we first discern OPEC's oil production behavior in response to its “cut”, “maintain”, and “increase” decisions. Then by applying the ARMA-GARCH class models to the two global benchmarks WTI and Brent over the period May 1987 through December 2012, we find strong evidence of long memory. The empirical evidence also shows that OPEC's announcements especially the “cut” and the “maintain” decisions have a significant effect on both returns and volatility of the crude oil markets, particularly that of the WTI. Moreover, we explore the possibility of structural breaks in the crude oil prices and detect five (six) breakpoints for the WTI (Brent) oil markets. The presence of structural breaks reduces the persistence of volatility. Accounting for OPEC's scheduled news announcements in the presence of structural changes reduces the degree of volatility persistence and enhances the understanding of this volatility in the oil markets. These results have several implications for policy makers, oil traders and other participants in the crude oil markets.