Energy Sector Pricing: On the Role of Neglected Nonlinearity

Abstract

Modern economies have been subjected to a number of shocks during the past several years such as the burst of the Internet bubble, terrorist attacks, corporate scandals, the war in Iraq, the uncertainty about energy prices, and the recent subprime mortgage crisis. In particular, during the last few years, the energy shock has caused concerns for potential stagflation for both the United States and numerous other countries. We perform numerous univariate tests for non-linearity and chaotic structure using price data from the energy sector to resolve whether the sector's fundamentals or exogenous shocks drive these prices.

Keywords: Energy, Nonlinearity, Chaotic Dynamics

JEL Classification: C22, C45, D40, G10, Q40