A three-factor stochastic model for forecasting production of energy materials

Abstract

In this paper, we present a generalized stochastic three-factor model to forecast changes in the industrial production of energy materials. This approach is new as, by deriving a stochastic process correlated with its mean and volatility, we convert it into an uncorrelated auxiliary process through Lamperti transformations. We show that the proposed model can be used for forecasting the change in the equilibrium between demand and supply of energy materials and could be further developed for setting up a reference pricing model for the market.