{"title":"Understanding the Oil Price Movement: Short versus Long Run Using the Leap Frog Model","authors":"Yosef Bonaparte","doi":"10.2139/ssrn.2841916","DOIUrl":null,"url":null,"abstract":"This paper studies the oil price movement accounting for time horizon. Historical data demonstrates that the price of oil jumps from one state (condition) to another, remains stable stays for some time, and then jumps again to a new state, a phenomenon that is similar to 'leap frog'. Motivated by this phenomena, we present a model named 'leap frog' to estimate the probability, price, and duration for each price state to predict future oil prices. We find that analyzing the oil price for different time horizons (weekly, monthly, and quarterly) conveys different inferences: the shorter the time horizon, the greater the number of states that the price (frog) may jump (leap) to and the shorter duration in each state. Motivated by these findings, we also study the co-movement between the real economic activity and oil price and find it varies by time horizons, which has implications for measuring economic significance for shocks on oil prices. Finally, we exploit the leap frog model to employ an out of sample approach for trading strategy and yield an 0.035% average monthly excess return over the oil price growth. Collectively, oil price movement should be analyzed based on the time horizon of interest.","PeriodicalId":343955,"journal":{"name":"SRPN: Oil (Topic)","volume":"66 1","pages":"0"},"PeriodicalIF":0.0000,"publicationDate":"2016-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"2","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"SRPN: Oil (Topic)","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.2841916","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 2
Abstract
This paper studies the oil price movement accounting for time horizon. Historical data demonstrates that the price of oil jumps from one state (condition) to another, remains stable stays for some time, and then jumps again to a new state, a phenomenon that is similar to 'leap frog'. Motivated by this phenomena, we present a model named 'leap frog' to estimate the probability, price, and duration for each price state to predict future oil prices. We find that analyzing the oil price for different time horizons (weekly, monthly, and quarterly) conveys different inferences: the shorter the time horizon, the greater the number of states that the price (frog) may jump (leap) to and the shorter duration in each state. Motivated by these findings, we also study the co-movement between the real economic activity and oil price and find it varies by time horizons, which has implications for measuring economic significance for shocks on oil prices. Finally, we exploit the leap frog model to employ an out of sample approach for trading strategy and yield an 0.035% average monthly excess return over the oil price growth. Collectively, oil price movement should be analyzed based on the time horizon of interest.