Daily prediction of short-term trends of crude oil prices using neural networks exploiting multimarket dynamics |
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Authors: | Heping Pan Imad Haidar and Siddhivinayak Kulkarni |
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Affiliation: | (1) Prediction Research Centre (PRC), University of Electronic Science and Technology of China, Chengdu, 610054, China;(2) Finance Research Centre of China, Southwest University of Finance and Economics, Chengdu, 610074, China;(3) Swingtum Institute of Intelligent Finance, Swingtum Prediction Pty Ltd 17 Southern Court, Delacombe, VIC 3356, Australia;(4) School of ITMS, University of Ballarat, VIC 3350 Ballarat, Australia |
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Abstract: | This paper documents a systematic investigation on the predictability of short-term trends of crude oil prices on a daily
basis. In stark contrast with longer-term predictions of crude oil prices, short-term prediction with time horizons of 1–3
days posits an important problem that is quite different from what has been studied in the literature. The problem of such
short-term predicability is tackled through two aspects. The first is to examine the existence of linear or nonlinear dynamic
processes in crude oil prices. This sub-problem is addressed with statistical analysis involving the Brock-Dechert-Scheinkman
test for nonlinearity. The second aspect is to test the capability of artificial neural networks (ANN) for modeling the implicit
nonlinearity for prediction. Four experimental models are designed and tested with historical data: (1) using only the lagged
returns of filtered crude oil prices as input to predict the returns of the next days; this is used as the benchmark, (2)
using only the information set of filtered crude oil futures price as input, (3) combining the inputs from the benchmark and
second models, and (4) combing the inputs from the benchmark model and the intermarket information. In order to filter out
the noise in the original price data, the moving averages of prices are used for all the experiments. The results provided
sufficient evidence to the predictability of crude oil prices using ANN with an out-of-sample hit rate of 80%, 70%, and 61%
for each of the next three days’ trends. |
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Keywords: | crude oil prediction short-term trend crude oil futures heating oil neural networks intermarket analysis |
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