A Hybrid Approach for Forecasting of Oil Price Volatility

This study aims to introduce an ideal model for forecasting crude oil price volatility. For this purpose, the 'predictability' hypothesis was tested using the variance ratio test, BDS1 test and the chaos analysis. Structural analyses were also carried out to identify possible non-linear pattems in this series. On this basis, Lyapunov exponents confirmed that the return series of crude oil price is chaotic. Moreover, according to the findings, the rate of return series has the long memory property rejecting the efficient market hypothesis and affirming the fractal markets hypothesis. The results of the Geweke and Porter-Hudak test verified that both the rate of retum and volatility series of crude oil price have the long memory property. Besides, according to both mean square error (MSE) and root mean square error (RMSE) criteria, wavelet-decomposed data improve the performance ofthe model significantly. Therefore, a hybrid model was introduced based on the long memory property which uses wavelet decomposed data as the most relevant model.