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

Antonio López Velarde Loera (), José Antonio Núñez Mora () and M. Beatriz Mota Aragón ()
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Antonio López Velarde Loera: Tecnologico de Monterrey
José Antonio Núñez Mora: Tecnologico de Monterrey
M. Beatriz Mota Aragón: Universidad Autónoma Metropolitana

Economía: teoría y práctica, 2021, vol. 54, issue 1, 109-136

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

Keywords: Commodity prices; energy markets; risk management; Markov chains (search for similar items in EconPapers)
JEL-codes: C02 C14 C15 N7 P28 P34 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ety:journl:v:54:y:2021:i:1:p:109-136

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