Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Oil Price Forecasting : A Markov Switching Approach with Unobserved Component Model

  • Nam, Si-Kyung (POSCO Research Institute, Center for steel Study) ;
  • Sohn, Young-Woo (POSCO Research Institute, Center for Management Study)
  • Published : 2008.11.30
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Abstract

There are many debates on the topic of the relationship between oil prices and economic growth. Through the repeated processes of conformations and contractions on the subject, two main issues are developed; one is how to define and drive oil shocks from oil prices, and the other is how to specify an econometric model to reflect the asymmetric relations between oil prices and output growth. The study, thus, introduces the unobserved component model to pick up the oil shocks and a first-order Markov switching model to reflect the asymmetric features. We finally employ unique oil shock variables from the stochastic trend components of oil prices and adapt four lags of the mean growth Markov Switching model. The results indicate that oil shocks exert more impact to recessionary state than expansionary state and the supply-side oil shocks are more persistent and significant than the demand-side shocks.

Keywords

References

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