Forecasting crude oil price using Kalman Filter based on the reconstruction of modes of decomposition ensemble model

• Main Authors: Gao, W., Aamir, M., Shabri, Ani, Dewan, Ritika, Aslam, Adnan
• Format: Article
• Published: Institute of Electrical and Electronics Engineers Inc. 2019
• Subjects: QA Mathematics
• Online Access: http://eprints.utm.my/id/eprint/87802/; http://dx.doi.org/10.1109/ACCESS.2019.2946992
• Institution: Universiti Teknologi Malaysia

The modes' reconstruction into the stochastic and deterministic components is proposed for forecasting the crude oil prices with the concept of "divide and conquer" and modes reconstruction. It is to reduce the complexity in the computation and to enhance the forecasting accuracy of the decomposition ensemble technique. Under the framework of "divide and conquer", the decomposition and ensemble methodologies of forecasting power successfully improves with the proposed model based on the modes' reconstruction. The corresponding reconstruction is using average mutual information (AMI). The proposed procedure is based on four layers i.e., complex data decomposition, reconstruction of modes into components, the prediction of each individual component and assembling the final prediction. In the proposed procedure, the modes of the stochastic component are analyzed thoroughly as it influences the prediction results significantly. For verification and illustration purposes, the case study of Brent and West Texas Intermediate (WTI) daily crude oil prices data are used, and the empirical study confirms that the outcomes outperform all the considered benchmark models, including auto-regressive integrated moving average (ARIMA) model, generalized autoregressive conditional heteroscedasticity (GARCH) model, NAÏVE model, ARIMA Kalman Filter model. This outcome is achieved, with the reconstruction decomposition ensemble (RDE) model along stochastic and deterministic components. Hence, it is concluded that the proposed model achieved higher forecasting accuracy and takes less computational time with the modes' reconstruction as opposed to using all the decompose modes.