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Modelling Crude Oil and Refined Petroleum Product Spreads: An Alternative Tool for Risk Quantification

Author

Listed:
  • Antonio López Velarde Loera

    (Tecnologico de Monterrey)

  • José Antonio Núñez Mora

    (Tecnologico de Monterrey)

  • M. Beatriz Mota Aragón

    (Universidad Autónoma Metropolitana)

Abstract

In this paper, an alternative approach to modeling and simulating spreads between crude oil and petro-leum products is proposed. The aim is to provide a model that can be used as a risk management tool for risk quantification purposes. In particular, the relationship between the crude oil and gasoline spread and crude oil price was assessed. The methodology proposed is based on first-order Markov chain simulations. We demonstrate that although the proposed model is based on the empirical behavior of energy commodity spreads, this risk management tool reduces misquantifications of the risk generated by the price differentials of particular concern to this study and that this modeling alternative can help diminish model risk with respect to other existing models

Suggested Citation

  • Antonio López Velarde Loera & José Antonio Núñez Mora & M. Beatriz Mota Aragón, 2021. "Modelling Crude Oil and Refined Petroleum Product Spreads: An Alternative Tool for Risk Quantification," Economía: teoría y práctica, Universidad Autónoma Metropolitana, México, vol. 54(1), pages 109-136, Enero-Jun.
    • Handle: RePEc:ety:journl:v:54:y:2021:i:1:p:109-136
    DOI: 10.24275/ETYPUAM/NE/542021/Lopez
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    More about this item

    Keywords

    Commodity prices; energy markets; risk management; Markov chains;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • N7 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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