A trend deduction model of fluctuating oil prices

Haiyan Xu and ZhongXiang Zhang

MPRA Paper from University Library of Munich, Germany

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 August 2009, 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.

Keywords: Oil price; Log-normality distribution; Limit probability of a Markov Chain; Trend deduction model; OPEC (search for similar items in EconPapers)
JEL-codes: C12 C49 F01 O13 Q41 Q47 (search for similar items in EconPapers)
Date: 2010-08-19, Revised 2010-11-17
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: A Trend Deduction Model of Fluctuating Oil Prices (2011)
Working Paper: A Trend Deduction Model of Fluctuating Oil Prices (2011)
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