Energy security: Stochastic analysis of oil prices
Skindilias, Konstantinos1; Lo, Chia Chun2
Source PublicationLecture Notes in Energy
AbstractPurpose: In this chapter we perform a comprehensive analysis of energy price dynamics. A variety of diffusion processes widely used in finance area calibrated from historical prices over periods of high uncertainty. Design/Methodology/Approach: We compute the maximum-likelihood estimates based on the density expansion technique when the density function of underlying process is unknown. We aim to identify the most appropriate functional specification for energy price modeling in terms of different model selection criteria. Findings: We found that the standard geometric Brownian motion and AR(1) type mean-reverting process perform poorly in our prediction exercise. The nonlinear drift diffusion model and variance-gamma process, on the other hand, generate satisfactory outcomes in this competition. Furthermore, the nonlinear drift model indeed produces the narrowest prediction interval and the highest fifth percentile of oil price among all models. Practical Implications: Our finding may suggest that the variation of the oil price dynamics at least can be partially explained by the nonlinear drift specification (or nonlinear mean reverting). A model without the nonlinear drift specification may simply overestimate the volatility and value at risk. Originality/Value: Of the leading threats to energy security is a significant increase in energy prices. Having a better understanding about uncertainty in the energy price can add stability in decision and policy making. As a result, this area has attracted attention from policy makers to speculators, to assess energy security and diversification. In this chapter we perform a comprehensive analysis of energy price dynamics., © Springer-Verlag London 2013.
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Document TypeJournal article
CollectionUniversity of Macau
Affiliation1.ABM Analytics, 145-157 St John Street, EC1V 4PW, London, United Kingdom;
2.University of Macau, Avenida Padre Tomas Pereira, Taipa, Macau, China
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GB/T 7714
Skindilias, Konstantinos,Lo, Chia Chun. Energy security: Stochastic analysis of oil prices[J]. Lecture Notes in Energy,2013,16:155-178.
APA Skindilias, Konstantinos,&Lo, Chia Chun.(2013).Energy security: Stochastic analysis of oil prices.Lecture Notes in Energy,16,155-178.
MLA Skindilias, Konstantinos,et al."Energy security: Stochastic analysis of oil prices".Lecture Notes in Energy 16(2013):155-178.
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