White-paper: Making Sense of Diesel Prices
[June 12,2013] This week, we present our fourth installment in our ongoing series of selected case studies. As with the other installments, we use real financial data to construct models with the help of NumXL
In this case study, we examine closely the highway retail price ($/Gallon) for "No.2 Ultra Low Sulfur (0-15 ppm) Diesel" in the EIAi nine (9) PADD regions. We carry on principal component analysis in an attempt to find a minimal subset of the principal components that capture (or explains) the variation (spreads) in prices across different regions with a minimal loss of information.
Why do we care? Developing a solid understanding of the principal component analysis and the interpretation of results will become a cornerstone in risk management, portfolio allocation, and hedging applications.