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Stochastic level shifts and outliers and the dynamics of oil price movements

  • Trimbur, Thomas M.

Oil prices clearly play an important role in the macroeconomy. The dynamics of oil prices have, however, been difficult to pin down because of the frequent occurrence of large shocks. In this paper, we propose a time series model with heavy-tailed disturbances to analyze the dynamics of the oil price. The model has the form of a generalized local linear trend, and we show that it successfully captures outliers and level shifts as empirical regularities in the oil price, including known historical price shocks. Further, the results of a forecast exercise are given, and we study extensions that examine the effect of the GDP cycle on the oil price.

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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 26 (2010)
Issue (Month): 1 (January)
Pages: 162-179

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Handle: RePEc:eee:intfor:v:26:y::i:1:p:162-179
Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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  1. Harvey, A.C. & Trimbur, T.M., 2001. "General Model-based Filters for Extracting Cycles and Trends in Economic Time Series," Cambridge Working Papers in Economics 0113, Faculty of Economics, University of Cambridge.
  2. Robert B. Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 115-134, Fall.
  3. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
  4. Raymond, Jennie E & Rich, Robert W, 1997. "Oil and the Macroeconomy: A Markov State-Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 193-213, May.
  5. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  6. Harvey, Andrew C. & Trimbur, Thomas M. & Van Dijk, Herman K., 2007. "Trends and cycles in economic time series: A Bayesian approach," Journal of Econometrics, Elsevier, vol. 140(2), pages 618-649, October.
  7. Thomas M. Trimbur, 2006. "Properties of higher order stochastic cycles," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(1), pages 1-17, 01.
  8. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, March.
  9. Neil Shephard & Jurgen Doornik & Siem Jan Koopman, 1998. "Statistical algorithms for models in state space using SsfPack 2.2," Economics Series Working Papers 1998-W06, University of Oxford, Department of Economics.
  10. Leduc, Sylvain & Sill, Keith, 2004. "A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 781-808, May.
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