Small Trends and Big Cycles in Crude Oil Prices

41 Pages Posted: 28 Nov 2012 Last revised: 1 Apr 2013

See all articles by Xiaoyi Mu

Xiaoyi Mu

Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee

Haichun Ye

Chinese University of Hong Kong, Shenzhen

Date Written: November 27, 2012

Abstract

In this paper, we employ an unobserved components model to disentangle the long-term trend from cyclical movements in international benchmark crude oil prices using data from 1861 to 2010. The in-sample estimation of the model identifies a deterministic quadratic trend and two types of cycles, with the short cycle having a period of 6 years and the long cycle of 29 years. Compared to the large amplitude of the cycles, the growth rate of the long-term trend is small. The out-of-sample forecasting performance of various competing models is compared to that of a “no change” random walk forecast. While the random walk forecast tends to be the most accurate in shorter horizons, it is outperformed by the trend-cycle models in longer horizons. The results provide evidence of predictability in the price of crude oil in longer horizons.

Keywords: oil price, unobserved components model, cycle, trend, forecast

JEL Classification: Q4, C22, N7

Suggested Citation

Mu, Xiaoyi and Ye, Haichun, Small Trends and Big Cycles in Crude Oil Prices (November 27, 2012). USAEE Working Paper No. 12-147, Available at SSRN: https://ssrn.com/abstract=2181713 or http://dx.doi.org/10.2139/ssrn.2181713

Xiaoyi Mu (Contact Author)

Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee ( email )

University of Dundee
Dundee, Scotland DD1 4HN
United Kingdom

Haichun Ye

Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Boulevard, Longgang District
Shenzhen, 518172

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