TY - JOUR
T1 - Component structure for nonstationary time series
T2 - Application to benchmark oil prices
AU - Bhar, Ramaprasad
AU - Hammoudeh, Shawkat
AU - Thompson, Mark A.
PY - 2008/12
Y1 - 2008/12
N2 - 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.
AB - 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.
KW - Kalman filter
KW - One-step ahead forecasts
KW - Permanent component
KW - Transitory component
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U2 - 10.1016/j.irfa.2008.07.003
DO - 10.1016/j.irfa.2008.07.003
M3 - Article
AN - SCOPUS:54949158075
SN - 1057-5219
VL - 17
SP - 971
EP - 983
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
IS - 5
ER -