A Nonparametric Model for High-Frequency Energy Prices

Gudkov Nikolay () and Ignatieva Katja ()
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Gudkov Nikolay: RiskLab, Department of Mathematics, ETH Zurich, Zurich, Switzerland
Ignatieva Katja: Business School, School of Risk and Actuarial Studies, UNSW Sydney, Sydney, NSW, 2052, Australia

Studies in Nonlinear Dynamics & Econometrics, 2025, vol. 29, issue 6, 699-726

Abstract: This paper proposes an efficient approach for modelling a high frequency continuous time diffusion process for the dynamics of crude oil. While various applications of continuous time models are considered in the literature, the results on choosing the right model are mixed. We employ a very general non-parametric approach to capture the dynamics of the crude oil market proxied by United States Oil (USO) exchange traded fund. This approach is purely data driven and does not require specification of the drift or the diffusion coefficient function. The proposed nonparametric kernel-based estimation procedure relies on the local polynomial kernel regression, where the choice of a bandwidth parameter plays a significant role. We demonstrate that besides offering a convenient way of estimating the continuous-time models for energy prices, our estimation procedure performs well when dealing with predicting USO prices out-of-sample. The analysis is extended by incorporating possible jump diffusion, where the assumption of continuity of the stochastic process is relaxed and a jump component is added to the diffusion process. In addition, we extend our model by adding possible seasonalities in the underlying dynamics, which requires decomposing the price by means of the Maximum Overlap Discrete Wavelet Transform (MODWT) algorithm and applying nonparametric kernel-based estimation procedure to modelling of the deseasonalized prices.

Keywords: high frequency data; model specification; nonparametric estimation; wavelet analysis (search for similar items in EconPapers)
JEL-codes: C00 C01 C02 C10 C14 C58 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/snde-2022-0113

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