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Stochastic models for oil prices and the pricing of futures on oil

Journal Article


Abstract


  • In this article, we investigate and compare the performance of various one-factor diffusion models in their ability to capture the behaviour of Brent crude oil prices. New proposed models, which have a three-quarters power in the diffusion term, are found to outperform all other popular models tested. Analytic solutions for futures prices under the new models are found and used to calibrate market prices. Results from the calibration show that one of the new three-quarters models with a mean-reverting property outperforms other popular models in fitting and forecasting futures prices.

Publication Date


  • 2015

Citation


  • Aba Oud, M. A. & Goard, J. (2015). Stochastic models for oil prices and the pricing of futures on oil. Applied Mathematical Finance, 22 (2), 189-206.

Scopus Eid


  • 2-s2.0-84924247979

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/4517

Number Of Pages


  • 17

Start Page


  • 189

End Page


  • 206

Volume


  • 22

Issue


  • 2

Abstract


  • In this article, we investigate and compare the performance of various one-factor diffusion models in their ability to capture the behaviour of Brent crude oil prices. New proposed models, which have a three-quarters power in the diffusion term, are found to outperform all other popular models tested. Analytic solutions for futures prices under the new models are found and used to calibrate market prices. Results from the calibration show that one of the new three-quarters models with a mean-reverting property outperforms other popular models in fitting and forecasting futures prices.

Publication Date


  • 2015

Citation


  • Aba Oud, M. A. & Goard, J. (2015). Stochastic models for oil prices and the pricing of futures on oil. Applied Mathematical Finance, 22 (2), 189-206.

Scopus Eid


  • 2-s2.0-84924247979

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/4517

Number Of Pages


  • 17

Start Page


  • 189

End Page


  • 206

Volume


  • 22

Issue


  • 2