Component structure for nonstationary time series: Application to benchmark oil prices

Ramaprasad Bhar, Shawkat Hammoudeh, Mark Andrew Thompson

Research output: Contribution to journalArticle

14 Citations (Scopus)

Abstract

The oil market is characterized by several hundreds of different grades of crude extracted from various locations on the planet, but prices of those grades are structured with reference to only a handful of benchmark varieties. In this context, the ability to predict near term benchmark oil prices takes on special importance. In this paper, we explore an approach to model the benchmark oil price behaviors using a structure of permanent and transitory components. This initial attempt seems very encouraging at least with respect to one-week ahead forecast and deserves further investigation. In contrast to the equities, the weekly oil permanent components do not seem to be explainable by fundamental factors. However, the returns of the short-run, transitory oil components or cycles, which differ in terms of their degrees of persistence, are mostly affected by contagion spillovers and not by the fundamentals. Their volatilities vary slightly in terms of their sensitivity to major geopolitical events. The overall findings underscore the importance of benefiting more from spillover-catching strategies over diversification ones in the short-run.

Original languageEnglish (US)
Pages (from-to)971-983
Number of pages13
JournalInternational Review of Financial Analysis
Volume17
Issue number5
DOIs
StatePublished - Dec 1 2008

Fingerprint

Oil prices
Non-stationary time series
Benchmark
Oil
Spillover
Short-run
Permanent and transitory components
Permanent component
Oil markets
Persistence
Diversification
Contagion
Factors
Equity

Keywords

  • Kalman filter
  • One-step ahead forecasts
  • Permanent component
  • Transitory component

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Component structure for nonstationary time series : Application to benchmark oil prices. / Bhar, Ramaprasad; Hammoudeh, Shawkat; Thompson, Mark Andrew.

In: International Review of Financial Analysis, Vol. 17, No. 5, 01.12.2008, p. 971-983.

Research output: Contribution to journalArticle

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