Dissecting Two Approaches to Energy Prices
Abstract
Problem statement: This research tested the viability of Geometric Brownian Motion as a stochastic model of oil prices. Approach: Using autoregressions and unit root tests, we determined that oil prices tend not to exhibit the Markov Property and thus GBM may be a problematic model. Results: Instead, oil prices seem to be mean reverting over the long run, possibly following an Ornstein-Uhlenbeck process. Conclusion/Recommendations: To determine whether or not OPEC was the cause of mean reversion, we repeated the tests after controlling for quotas, only to find the same results did not apply over the short run.
DOI: https://doi.org/10.3844/jmssp.2011.98.102
Copyright: © 2011 Julius N. Esunge and Andrew Snyder-Beattie. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
- 3,833 Views
- 2,651 Downloads
- 1 Citations
Download
Keywords
- Markov property
- commodity market
- Ornstein-Uhlenbeck (OU)
- energy prices
- quota periods
- stochastic processes