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Predicting crashes in oil prices during the COVID-19 pandemic with mixed causal-noncausal models

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  • Alain Hecq
  • Elisa Voisin
Abstract
This paper aims at shedding light upon how transforming or detrending a series can substantially impact predictions of mixed causal-noncausal (MAR) models, namely dynamic processes that depend not only on their lags but also on their leads. MAR models have been successfully implemented on commodity prices as they allow to generate nonlinear features such as locally explosive episodes (denoted here as bubbles) in a strictly stationary setting. We consider multiple detrending methods and investigate, using Monte Carlo simulations, to what extent they preserve the bubble patterns observed in the raw data. MAR models relies on the dynamics observed in the series alone and does not require economical background to construct a structural model, which can sometimes be intricate to specify or which may lack parsimony. We investigate oil prices and estimate probabilities of crashes before and during the first 2020 wave of the COVID-19 pandemic. We consider three different mechanical detrending methods and compare them to a detrending performed using the level of strategic petroleum reserves.

Suggested Citation

  • Alain Hecq & Elisa Voisin, 2019. "Predicting crashes in oil prices during the COVID-19 pandemic with mixed causal-noncausal models," Papers 1911.10916, arXiv.org, revised May 2022.
    • Handle: RePEc:arx:papers:1911.10916
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    1. F. Blasques & S.J. Koopman & G. Mingoli & S. Telg, 2024. "A Novel Test for the Presence of Local Explosive Dynamics," Tinbergen Institute Discussion Papers 24-036/III, Tinbergen Institute.
    2. Francesco Giancaterini & Alain Hecq, 2020. "Inference in mixed causal and noncausal models with generalized Student's t-distributions," Papers 2012.01888, arXiv.org, revised Nov 2022.

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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