IIFT KOLKATA CAMPUS

AFTBA: Assignment- 2
Group 6
Ilica chauhan(16) Naba Kr. Medhi (24) Pankaj Malhotra (27) Tanmoy Mondal(40) Keerthi Hari(56)

2012-14

Assignment 2
Crude Oil monthly price from June 1983 to June 2013 is taken as the data set. The demand for oil is highly dependent on global macroeconomic conditions. According to the International Energy Agency, high oil prices generally have a large negative impact on the global economic growth. The price of oil underwent a significant decrease after the record peak of US$145 it reached in July 2008. On December 23, 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since the financial crisis of 2007 2010 began, and traded at between US$35 a barrel and US$82 a barrel in 2009. On 31 January 2011, the Brent price hit $100 a barrel for the first time since October 2008, on concerns about the political unrest in Egypt.

Crude Oil Price

140 120 100 80 60 40 20 0 Oct-90 Oct-01 Aug-92 Aug-03 Feb-87 Feb-98 Dec-88 Dec-99 Feb-09 Dec-10 Price

Apr-85

Apr-96

There are 361 observations in total. We have developed the model for 359 observations and validated the model by forecasting 361st observation and verifying it with the actual data. Price is the dependent variable whereas Month (time) is the independent variable. We have used the first-order autoregressive process AR(1) in our model.

Apr-07

Oct-12

Jun-94

Jun-05

Jun-83

Forecasting model used in EViews is as following:

price c month ar(1)

After execution we have the following graph:

Dependent Variable: PRICE Method: Least Squares Date: 07/28/13 Time: 01:11 Sample (adjusted): 2 359 Included observations: 358 after adjustments Convergence achieved after 12 iterations Variable C MONTH AR(1) R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Inverted AR Roots Coefficient -7853.656 0.010809 0.978025 0.983643 0.983551 3.796754 5117.445 -984.0981 10674.05 0.000000 .98 Std. Error 2485.771 0.003399 0.010564 t-Statistic -3.159444 3.180168 92.58420 Prob. 0.0017 0.0016 0.0000 37.94704 29.60324 5.514514 5.547033 5.527447 1.128548

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

PriceT = -7853.656 + 0.010809 T + 0.978025 PriceT-1 + Error term

R-squared is a statistic that will give some information about the goodness of fit of a model. In regression, the R-squared coefficient of determination is a statistical measure of how well the regression line approximates the real data points. An R-squared of 1 indicates that the regression line perfectly fits the data. In the above model R-squared = 0.9836 which is indication of a good fit.

AIC deals with the trade-off between the goodness of fit of the model and the complexity of the model. The Schwarz criterion index takes into account both the statistical goodness of fit and the number of parameters that have to be estimated to achieve this particular degree of fit, by imposing a penalty for increasing the number of parameters. In the above model, both AIC and SIC have low values which indicates as a good forecasting model.

F-statistic computes the standard F-test of the joint hypothesis that all the coefficients, except the intercept, equal zero. Prob(F-statistic) displays the p-value corresponding to the reported F-statistic. In our model, there is essentially no chance at all that the coefficients of the righthand side variables all equal zero.

Model Validation We have forecasted the 361st observation and have the following result. Actual Price = 99.74 Forecasted Price = 99.50023 The actual value and the estimated value have 0.24% difference and thus model has a very good fit.

2-step ahead extrapolation forecast is a follows:

*the number of data points are many (361), thus it is very less visible in the graph (shown with a circle).