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A Trend Deduction Model of Fluctuating Oil Prices

USAEE-IAEE Working Paper No. 11-077

22 Pages Posted: 24 Apr 2011 Last revised: 9 May 2011

Haiyan Xu

Fudan University - Institute of International Studies; Fudan University - Center for Energy Economics and Strategy Studies

ZhongXiang Zhang

Tianjin University - College of Management and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 24, 2011

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 April 2010, 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

JEL Classification: Q41, Q47, C12, C49, F01, O13

Suggested Citation

Xu, Haiyan and Zhang, ZhongXiang, A Trend Deduction Model of Fluctuating Oil Prices (April 24, 2011). USAEE-IAEE Working Paper No. 11-077. Available at SSRN: https://ssrn.com/abstract=1821724 or http://dx.doi.org/10.2139/ssrn.1821724

Haiyan Xu

Fudan University - Institute of International Studies ( email )

No.220, Handan Road, Shanghai, P.R. China
Shanghai, 200433
China

Fudan University - Center for Energy Economics and Strategy Studies

No.220, Handan Road, Shanghai, P.R. China
Shanghai, 200433
China

ZhongXiang Zhang (Contact Author)

Tianjin University - College of Management and Economics ( email )

92 Weijin Road
Nankai District
Tianjin, Tianjin 300072
China
+86 22 87370560 (Phone)

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