Research Article Open Access

Dissecting Two Approaches to Energy Prices

Julius N. Esunge and Andrew Snyder-Beattie

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.

Journal of Mathematics and Statistics
Volume 7 No. 2, 2011, 98-102

DOI: https://doi.org/10.3844/jmssp.2011.98.102

Submitted On: 14 April 2011 Published On: 18 May 2011

How to Cite: Esunge, J. N. & Snyder-Beattie, A. (2011). Dissecting Two Approaches to Energy Prices. Journal of Mathematics and Statistics, 7(2), 98-102. https://doi.org/10.3844/jmssp.2011.98.102

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Keywords

  • Markov property
  • commodity market
  • Ornstein-Uhlenbeck (OU)
  • energy prices
  • quota periods
  • stochastic processes