Quantifying time-varying forecast uncertainty and risk for the real price of oil

Tinbergen Institute Discussion Paper 2021-053/III

39 Pages Posted: 15 Jun 2021

See all articles by Knut Are Aastveit

Knut Are Aastveit

Norges Bank

Jamie Cross

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA); Center of Applied Macroeconomics and Commodity Prices (CAMP), BI Norwegian Business School

H. K. van Dijk

Tinbergen Institute; Econometric Institute

Multiple version iconThere are 2 versions of this paper

Date Written: June 6, 2021

Abstract

We propose a novel and numerically efficient quantification approach to forecast uncertainty of the real price of oil using a combination of probabilistic individual model forecasts. Our combination method extends earlier approaches that have been applied to oil price forecasting, by allowing for sequentially updating of time-varying combination weights, estimation of time-varying forecast biases and facets of miscalibration of individual forecast densities and time-varying inter-dependencies among models. To illustrate the usefulness of the method, we present an extensive set of empirical results about time-varying forecast uncertainty and risk for the real price of oil over the period 1974-2018. We show that the combination approach systematically outperforms commonly used benchmark models and combination approaches, both in terms of point and density forecasts. The dynamic patterns of the estimated individual model weights are highly time-varying, reflecting a large time variation in the relative performance of the various individual models. The combination approach has built-in diagnostic information measures about forecast inaccuracy and/or model set incompleteness, which provide clear signals of model incompleteness during three crisis periods. To highlight that our approach also can be useful for policy analysis, we present a basic analysis of profit-loss and hedging against price risk.

Keywords: Oil price, Forecast density combination, Bayesian forecasting, Instabilities, Model uncertainty

Suggested Citation

Aastveit, Knut Are and Cross, Jamie and Cross, Jamie and van Dijk, Herman K., Quantifying time-varying forecast uncertainty and risk for the real price of oil (June 6, 2021). Tinbergen Institute Discussion Paper 2021-053/III, Available at SSRN: https://ssrn.com/abstract=3866129 or http://dx.doi.org/10.2139/ssrn.3866129

Knut Are Aastveit (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Jamie Cross

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Center of Applied Macroeconomics and Commodity Prices (CAMP), BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Herman K. Van Dijk

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)

HOME PAGE: http://people.few.eur.nl/hkvandijk/

Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
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+31 10 4088955 (Phone)
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