Comparative Performance of ARIMA and ARCH Models On Time Series of Monthly Libyan Brent Oil Price

Abstract

Many economic and financial time series exhibit a phenomenon known as heteroscedastic, where the variance of the series changes over time. This research study focuses on financial time series modelling, with special application to modelling the price of Libyan Brent Oil. In particular, the theory of univariate nonlinear time series analysis is explored and applied to the price Libyan of Brent Oil, spanning from January 2000 to December 2010. The data was obtained from Bullent of the Platts Market Wire of Statistics. This study aims to evaluate the performance of ARIMA as a linear model and ARCH as a nonlinear modelling data. Multiple time series models were considered for fitting the data, and the best ARIMA models were selected based on the Akaike Information Criteria (AIC). ARIMA (0, 1, 1), and ARIMA (1, 1, 0) were identified as the best models. After estimating the parameters of the selected models, model checking revealed that these models were not suitable for modeling the data, as they lacked validity according to the test of squared residuals. The goodness of fit was assessed using the AIC, and based on minimum AIC values, the best fit ARCH models were found to be ARIMA (0, 1, 1) - ARCH (1). After estimating the parameters of the selected model, a series of diagnostic and forecast accuracy tests were performed. Based on this model, a twelve-month forecast of the price of Libyan Brent crude was made.