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Geopolitical risk and crude oil price predictability: Novel decomposition ensemble approach based ternary interval number series

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  • Li, Ye
  • Chen, Yiyan
  • Lean, Hooi Hooi

Abstract

This study presents a forecast of the ternary interval number series of crude oil prices, including both mean and extreme. In contrast to the previous studies that usually rely on a single method for forecasting, this study combines multivariate empirical mode decomposition, back-propagation neural network, long short-term memory network, and least squares support vector regression, to put forward a decomposition ensemble model for the ternary interval. The method takes full advantage of different models to match the reconstructed subsequence, thus improving the accuracy and stability of the prediction. Moreover, to comprehensively understand the role of geopolitical risk in crude oil price forecasting, this study analyzes the heterogeneity of different types of geopolitical risk in various crude oil price forecasts. Based on the prediction results, our proposed method demonstrates favorable in-sample and out-of-sample prediction capabilities under different evaluation indexes. The prediction results of the total index show that the out-of-sample prediction accuracy for geopolitical risk in Brent crude oil is superior to that of West Texas Intermediate. In terms of the sub-indices (geopolitical action and threat), the out-of-sample prediction of geopolitical action surpasses that of geopolitical threat for both crude oils. On the other hand, the out-of-sample prediction of both geopolitical action and geopolitical threat is more accurate for Brent crude oil than West Texas Intermediate. The research conducted in this manuscript introduces a new perspective for forecasting crude oil prices based on geopolitical risk.

Suggested Citation

  • Li, Ye & Chen, Yiyan & Lean, Hooi Hooi, 2024. "Geopolitical risk and crude oil price predictability: Novel decomposition ensemble approach based ternary interval number series," Resources Policy, Elsevier, vol. 92(C).
  • Handle: RePEc:eee:jrpoli:v:92:y:2024:i:c:s0301420724003337
    DOI: 10.1016/j.resourpol.2024.104966
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