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A Trend Deduction Model of Fluctuating Oil Prices

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  • Haiyan Xu

    (Institute of International Studies, Fudan University and Center for Energy Economics and Strategy Studies, Fudan University)

  • ZhongXiang Zhang

    (East-West Center)

Abstract

Crude oil prices have been fluctuating over time and by a large range. It is the disorganization of oil price series that makes it difficult to deduce the changing trends of oil prices in the middle- and long-terms and predict their price levels in the short-term. Following a price-state classification and state transition analysis of changing oil prices from January 2004 to April 2010, this paper first verifies that the observed crude oil price series during the soaring period follow a Markov Chain. Next, the paper deduces the changing trends of oil prices by the limit probability of a Markov Chain. We then undertake a probability distribution analysis and find that the oil price series have a log-normality distribution. On this basis, we integrate the two models to deduce the changing trends of oil prices from the short-term to the middle- and long-terms, thus making our deduction academically sound. Our results match the actual changing trends of oil prices, and show the possibility of re-emerging soaring oil prices.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.22.

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Date of creation: Feb 2011
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Handle: RePEc:fem:femwpa:2011.22

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Related research

Keywords: Oil Price; Log-normality Distribution; Limit Probability of a Markov Chain; Trend Deduction Model; OPEC;

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  1. Mark Holmes & Ping Wang, 2003. "Oil Price Shocks and the Asymmetric Adjustment of UK Output: A Markov-switching approach," International Review of Applied Economics, Taylor & Francis Journals, vol. 17(2), pages 181-192.
  2. Vo, Minh T., 2009. "Regime-switching stochastic volatility: Evidence from the crude oil market," Energy Economics, Elsevier, vol. 31(5), pages 779-788, September.
  3. Kosobud, Richard F & Stokes, Houston H, 1978. "Oil Market Share Dynamics: A Markov Chain Analysis of Consumer and Producer Adjustments," Empirical Economics, Springer, vol. 3(4), pages 253-75.
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Cited by:
  1. Ibrahim Abada, 2012. "A stochastic generalized Nash-Cournot model for the northwestern European natural gas markets with a fuel substitution demand function: The S-GaMMES model," Working Papers 1202, Chaire Economie du Climat.
  2. Ibrahim Abada & Pierre-André Jouvet, 2013. "A stochastic generalized Nash-Cournot model for the northwestern European natural gas markets: The S-GaMMES model," Working Papers 1308, Chaire Economie du Climat.
  3. Ibrahim Abada, 2012. "Study of the evolution of the northwestern European natural gas markets using S-GaMMES," Working Papers 1203, Chaire Economie du Climat.

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