Probabilistic forecasts from probabilistic models: A case study in the oil market

Probabilistic forecasts from probabilistic models: A case study in the oil market

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Article ID: iaor19952128
Country: Netherlands
Volume: 11
Issue: 1
Start Page Number: 63
End Page Number: 72
Publication Date: Jan 1995
Journal: International Journal of Forecasting
Authors: ,
Keywords: forecasting: applications
Abstract:

Probabilistic forecasts, probabilistic models, and contingent policy recommendations are inextricably intertwined. This article describes a case study in the use of inherently probabilistic belief network models to produce probabilistic forecasts of average annual oil prices. Belief networks are flexible enough to capture both standard, data-driven economic variables, and quantified expert judgements about the politics of the oil market (particularly the production and capacity policies of key OPEC members). These variables are interrelated by a combination of algebraic formulas, conditional probabilities, and econometric relations. The resultant network is used to test the impact of a variety of different scenarios. The probabilistic forecasts generated by running Monte Carlo analyses on these scenario networks provide corporate decision-makers with useful insights and recommendations.

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