IND 833 Quiz: Mean_rev_parameters.pdf

• School: Ryerson University
• Department: Industrial Engineering
• Course: IND 833
• Professor: wahab

Document Summary

How to find parameters of a mean-reverting process: Assume that logarithm of a commodity price, x = ln(s), follows a mean reverting process, i. e. , where, = speed of the mean-reversion, = long-term mean, = standard deviation, and dz = a standard wiener increment. In the literature, the process is also known as an ornstein-uhlenbeck process. We have to find three parameters: , , and . As an example, the following is the daily gasoline prices from. Daily gasoline price r e t i l. 1. 2 e c i r p e n. Step 4: plot the logarithm of prices, x = ln(s). e c i r p e n i l o s a g f o h t i r a g o l. Step 5: find the returns, dx = ln(s2/s1)= lns2 lns1. In this specific example, we have the yearly daily data with 1 year = 365 days.