A Research on Markov Model and Hidden Markov Model in Crude Oil Price Forecasting for PETRONAS Malaysia

Abstract

Crude oil price forecasting is an essential component of sustainable development of many countries as crude oil is an unavoidable product that exists on earth. In this paper, a model based on a hidden Markov model and Markov model for crude oil price forecasting was developed, and their relative performance was compared. Path analysis of Structural Equation Modelling was employed to model the effects of forecasted prices and the actual crude oil price to get the most accurate forecast. The key variables used to develop the models were monthly crude oil prices s from PETRONAS Malaysia. It was found that the hidden Markov model was more accurate than the Markov model in forecasting the crude oil price. The findings of this study show that the hidden Markov model is a potentially promising method of crude oil price forecasting that merit further study.