Simulating and Forecasting OPEC Oil Price Using Stochastic Differential Equations

Abstract

The main purpose of this paper is to provide a quantitative analysis to investigate the behavior of the OPEC oil price. Obtaining the best mathematical equation to describe the price and volatility of oil has a great importance. Stochastic differential equations are one of the best models to determine the oil price, because they include the random factor which can apply the effect of different economical and political elements .In order to earn the best model, at first we study the effectiveness of different stochastic differential equations models and then using the daily OPEC oil price in years 2003 to 2016, according to the high oscillation of oil price due to the various economical and political creases, we divide the data to four parts and estimate the unknown parameters of the equations in these time periods using the General Method of Moment. At last, the best model can be defined by attention to the main price chart and numerical simulations.