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Crude oil price forecasting: Experimental evidence from wavelet decomposition and neural network modeling

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  • Jammazi, Rania
  • Aloui, Chaker

Abstract

Oil price prediction has usually proved to be an intractable task due to the intrinsic complexity of oil market mechanism. In addition, the recent oil shock and its consequences relaunch the debate on understanding the behavior underlying the expected oil prices. Combining the dynamic properties of multilayer back propagation neural network and the recent Harr A trous wavelet decomposition, a Hybrid model HTW-MPNN is implemented to achieve prominent prediction of crude oil price. While recent studies focus on the determination of the best forecasting model by comparing various neural architectures or applying several decomposition techniques to the ANN, the new insight of this paper is to target the issue of the transfer function selection providing robust simulations on both in sample and out of sample basis. Based on the work of Yonaba, H., Anctil, F., and Fortin, V. (2010) “Comparing Sigmoid Transfer Functions for Neural Network Multistep Ahead Stream flow forecasting”. Journal of Hydrologic Engineering, April, 275–283, we use three variants of activation function namely sigmoid, bipolar sigmoid and hyperbolic tangent in order to test the model's flexibility. Furthermore, the forecasting robustness is checked through several levels of input–hidden nodes. Comparatively, results of HTW-MBPNN perform better than the conventional BPNN. Our conclusions add a major attribute to the previous studies corroborating the Occam razor's principle, especially when simulations are constructed through training and testing phases simultaneously. Finally, more eligible forecasting power is found according to the wavelet oil price signal which appears to be the closest to the real anticipations of future oil price fluctuations.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 3 ()
Pages: 828-841

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:3:p:828-841

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Harr a Trous wavelet; Neural network; Back propagation; Crude oil price forecasting; Activation function; Input–hidden nodes; In-sample out-of-sample basis;

References

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  1. Nason, G.P. & von Sachs, R., 1999. "Wavelets in Time Series Analysis," Papers 9901, Catholique de Louvain - Institut de statistique.
  2. Dunis, Christian L & Huang, Xuehuan, 2002. "Forecasting and Trading Currency Volatility: An Application of Recurrent Neural Regression and Model Combination," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 21(5), pages 317-54, August.
  3. Siddhivinayak Kulkarni & Imad Haidar, 2009. "Forecasting Model for Crude Oil Price Using Artificial Neural Networks and Commodity Futures Prices," Papers 0906.4838, arXiv.org.
  4. Jammazi, Rania & Aloui, Chaker, 2010. "Wavelet decomposition and regime shifts: Assessing the effects of crude oil shocks on stock market returns," Energy Policy, Elsevier, vol. 38(3), pages 1415-1435, March.
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  6. Yu, Lean & Wang, Shouyang & Lai, Kin Keung, 2008. "Forecasting crude oil price with an EMD-based neural network ensemble learning paradigm," Energy Economics, Elsevier, vol. 30(5), pages 2623-2635, September.
  7. Yang, C. W. & Hwang, M. J. & Huang, B. N., 2002. "An analysis of factors affecting price volatility of the US oil market," Energy Economics, Elsevier, vol. 24(2), pages 107-119, March.
  8. Bernabe, Araceli & Martina, Esteban & Alvarez-Ramirez, Jose & Ibarra-Valdez, Carlos, 2004. "A multi-model approach for describing crude oil price dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 338(3), pages 567-584.
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Citations

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Cited by:
  1. Kriechbaumer, Thomas & Angus, Andrew & Parsons, David & Rivas Casado, Monica, 2014. "An improved wavelet–ARIMA approach for forecasting metal prices," Resources Policy, Elsevier, vol. 39(C), pages 32-41.
  2. Fang, Guochang & Tian, Lixin & Fu, Min & Sun, Mei, 2013. "The impacts of carbon tax on energy intensity and economic growth – A dynamic evolution analysis on the case of China," Applied Energy, Elsevier, vol. 110(C), pages 17-28.
  3. Xiong, Tao & Bao, Yukun & Hu, Zhongyi, 2013. "Beyond one-step-ahead forecasting: Evaluation of alternative multi-step-ahead forecasting models for crude oil prices," Energy Economics, Elsevier, vol. 40(C), pages 405-415.
  4. Godarzi, Ali Abbasi & Amiri, Rohollah Madadi & Talaei, Alireza & Jamasb, Tooraj, 2014. "Predicting oil price movements: A dynamic Artificial Neural Network approach," Energy Policy, Elsevier, vol. 68(C), pages 371-382.
  5. Reboredo, Juan C. & Rivera-Castro, Miguel A., 2014. "Wavelet-based evidence of the impact of oil prices on stock returns," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 145-176.

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