Duration of maximum drawdown in oil prices


Thesis Type: Postgraduate

Institution Of The Thesis: Orta Doğu Teknik Üniversitesi, Faculty of Arts and Sciences, Department of Statistics, Turkey

Approval Date: 2018

Student: MERVE SALCI BILICI

Supervisor: CEREN VARDAR ACAR

Abstract:

Oil price is a vital financial aspect directing the economy in the global world. Changes in the level of oil prices may affect the whole economy; at the same time economic developments may affect the oil prices. For example, while lower oil prices could inhibit financial development and spoil economic and political stability, higher oil prices could cause an increase in inflation and a recession in an economy. Sharp decreases and increases in oil prices have been notable in recent years. These fluctuations in oil prices become one of the key indicators in macroeconomics. Therefore, it is of utmost importance to analyze fluctuations in oil prices. The purpose of this study is to estimate the duration that is the maximum drawdown of highest possible drop in the oil prices. Maximum drawdown can be defined as the indication of the highest possible market risk in finance. In order to detect the maximum drawdown, super-cycles which are specified as total of an upward and a downward movement are determined in the data set which is the oil prices collected between the year 1948 and 2018. This is done by using filtering methods such as Hodrick-Prescott and Band Pass filter. Fractional Brownian motion process is used for modeling the oil prices since the increments are observed to be dependent. We have conducted simulation studies for calculating the expected value of the maximum drawdown and expected value of the duration of the maximum drawdown. In this study, comparison of simulation results and observed results from the real life data set is provided in order to make prediction and give discussion on the duration of the maximum drawdown of the oil prices.