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On the Brazilian fuel pricing policy: a Gaussian factor model approach

Author

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  • Fernando Antonio Lucena Aiube

Abstract

In this paper we investigate the oil spot price dynamics and volatility in Brazilian Reais (the local currency). The current policy on price adjustments of refined products caused enormous turmoil in May 2018 due to a trucking strike over high diesel prices. The current price adjustments follow variations of oil prices and exchange rate. This issue opens a discussion of the price transfers of imported oil products. The classic volatility analysis is difficult to carry out because price series in local currency are based on data with non-homogeneous frequency. We use a Gaussian factor model to estimate the oil spot price and then follow two different theoretical approaches to infer the dynamics and volatility in local currency. From these approaches, one can infer how high the volatility is compared to the first future contract taken as a benchmark. Furthermore, one can also monitor the short-term price forecasts once the conditional distribution is known from the dynamics established. This analysis can be applied to any type of refined product depending on the existence of a liquid term structure of future prices.

Suggested Citation

  • Fernando Antonio Lucena Aiube, 2020. "On the Brazilian fuel pricing policy: a Gaussian factor model approach," Applied Economics, Taylor & Francis Journals, vol. 52(8), pages 839-850, February.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:8:p:839-850
    DOI: 10.1080/00036846.2019.1659929
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