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Nonlinear Dynamics in Energy Futures

Abstract:
This paper studies the possible nonlinear and chaotic nature of three energy futures: natural gas, unleaded gasoline and light crude oil. Nonlinearity is analyzed using the generalized BDS statistic, along with Kaplan�s test. The results show that nonlinearity cannot be rejected. The null hypothesis of chaos is then investigated via the stability of the largest Lyapunov exponent. Evidence of chaos is found in futures returns. Global modelling techniques, like genetic algorithms, have been used in order to estimate potential motion equations. In addition, short term forecasts in futures price movements have been conducted with these estimated equations. The results show that although forecast errors are statistically smaller than those computed with other stochastic approaches, further research on these topics needs to be done.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Investment and Finance – Public and Private Risks, Risk Management; Energy Modeling – Forecasting and Market Analysis; Natural Gas – Markets and Prices

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
D81 - Criteria for Decision-Making under Risk and Uncertainty
D4 -

Keywords: Gasoline, Oil, Natural gas, Futures prices, nonlinear dynamics, chaos, Lyapunov, forecasting

DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No3-2


Published in Volume 28, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.