The Dynamics of Oil Price Shock and Its Frequency Jump in A Developing Country

Abstract

In many natural resources price, the intrinsic stochastic element driving the pricing process is the central characteristic. Understanding this underlying stochastic process is of cheap importance, particularly for crude oil due to its essential role in the world economy. Modeling petroleum prices assumes the market price of crude oil follows a continuous stochastic process that assumes smooth changes, either in a single factor or multi-factor Gaussian frame work. This changes (or jumps) however is not necessarily smooth but jumps unexpectedly rapidly. This paper determines the dynamics of these rapid jumps in the prices of crude oil, both in terms of spit prices and future prices. Furthermore, we obtain the future price of crude oil given the price dynamics.

Keywords: Oil prices, Jump diffusion, Price volatility, Stochastic dynamics.