A new approach for crude oil price analysis based on Empirical Mode Decomposition
The importance of understanding the underlying characteristics of international crude oil price movements attracts much attention from academic researchers and business practitioners. Due to the intrinsic complexity of the oil market, however, most of them fail to produce consistently good results. Empirical Mode Decomposition (EMD), recently proposed by Huang et al., appears to be a novel data analysis method for nonlinear and non-stationary time series. By decomposing a time series into a small number of independent and concretely implicational intrinsic modes based on scale separation, EMD explains the generation of time series data from a novel perspective. Ensemble EMD (EEMD) is a substantial improvement of EMD which can better separate the scales naturally by adding white noise series to the original time series and then treating the ensemble averages as the true intrinsic modes. In this paper, we extend EEMD to crude oil price analysis. First, three crude oil price series with different time ranges and frequencies are decomposed into several independent intrinsic modes, from high to low frequency. Second, the intrinsic modes are composed into a fluctuating process, a slowly varying part and a trend based on fine-to-coarse reconstruction. The economic meanings of the three components are identified as short term fluctuations caused by normal supply-demand disequilibrium or some other market activities, the effect of a shock of a significant event, and a long term trend. Finally, the EEMD is shown to be a vital technique for crude oil price analysis.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Abramson, Bruce & Finizza, Anthony, 1991. "Using belief networks to forecast oil prices," International Journal of Forecasting, Elsevier, vol. 7(3), pages 299-315, November.
- Abosedra, Salah & Baghestani, Hamid, 2004. "On the predictive accuracy of crude oil futures prices," Energy Policy, Elsevier, vol. 32(12), pages 1389-1393, August.
- Rotemberg, Julio J & Woodford, Michael, 1996.
"Imperfect Competition and the Effects of Energy Price Increases on Economic Activity,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(4), pages 550-77, November.
- Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
- Dees, Stephane & Karadeloglou, Pavlos & Kaufmann, Robert K. & Sanchez, Marcelo, 2007.
"Modelling the world oil market: Assessment of a quarterly econometric model,"
Elsevier, vol. 35(1), pages 178-191, January.
- DEES Stéphane & KARADELOGLOU Pavlos & KAUFMANN Robert & SANCHEZ Marcelo, . "Modelling the World Oil Market: Assessment of a Quarterly Econometric Model," EcoMod2003 330700040, EcoMod.
- Hillard G. Huntington, 1994. "Oil Price Forecasting in the 1980s: What Went Wrong?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-22.
- Morana, Claudio, 2001. "A semiparametric approach to short-term oil price forecasting," Energy Economics, Elsevier, vol. 23(3), pages 325-338, May.
- Kausik Chaudhuri, 2001. "Long-run prices of primary commodities and oil prices," Applied Economics, Taylor & Francis Journals, vol. 33(4), pages 531-538.
- 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.
- Pindyck, Robert S., 1998.
"The long-run evolution of energy prices,"
WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Bacon, Robert W, 1991. "Modelling the Price of Oil," Oxford Review of Economic Policy, Oxford University Press, vol. 7(2), pages 17-34, Summer.
- Sadorsky, Perry, 2002. "Time-varying risk premiums in petroleum futures prices," Energy Economics, Elsevier, vol. 24(6), pages 539-556, November.
- Abramson, Bruce & Finizza, Anthony, 1995. "Probabilistic forecasts from probabilistic models: A case study in the oil market," International Journal of Forecasting, Elsevier, vol. 11(1), pages 63-72, March.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:30:y:2008:i:3:p:905-918. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.