Country risk forecasting for major oil exporting countries: A decomposition hybrid approach

From the perspective of energy security, this paper focuses on country risk forecasting for major oil exporting countries. Due to the two main characteristics of country risk of oil exporting countries, i.e. the complexity and the mutability, this study proposes a decomposition hybrid approach (DHA) for predicting country risk of oil exporters, based on the principle of “decomposition and ensemble” and the strategy of “divide and conquer”. In DHA, effective decomposition methods, such as ensemble empirical mode decomposition (EEMD), are specially introduced to decompose oil exporter’s country risk into a series of relatively easily forecasting components; powerful prediction tools, such as least squares support vector regression (LSSVR), are then implemented to predict all extracted components; and finally these predicted results are fused into an ensemble for the original data via ensemble approaches, such as LSSVR model or simple addition (ADD) approach. Experimental results, with ten major oil exporters as study samples, demonstrate that DHA with decomposition process can be statistically proved to be much stronger and more robust than other popular prediction models.

► We propose a decomposition hybrid approach (DHA) for forecasting country risk.
► DHA is built based on intrinsic characteristics of country risk in oil-resource countries.
► A step of decomposition is added in DHA to reduce difficulty in modeling country risk.
► We forecast country risk of ten major oil exporting countries by DHA.
► Empirical results indicate that DHA significantly improves prediction performance.