Determining the Long-run Equilibrium Price by the Mean Reversion Process and the Cobweb Model

DOI: 10.5176/2251-1911_CMCGS13.18

Authors: Vuong Thi Thao Binh

Abstract:

In this paper, we deal with the long-run equilibrium price of complete markets. The long-run equilibrium level is obtained from mean reversion process. Furthermore, it can be determined from the cobweb model, identified by N. Kaldor (that model explains why prices in certain markets are subject to periodic fluctuation). To see it, we use a suitable mathematical presentation of the cobweb model. Experimental data of Europe Brent oil price illustrating the determination of the long-run equilibrium level from the mean reversion process and the cobweb model is presented.

Keywords: long-run equilibrium price, the cobweb model, Itô’s Lemma, mean reversion process, stochastic differential equation