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

Authors

Mohammed Aba Oud, University of WollongongFollow
Joanna M. Goard, University of WollongongFollow

RIS ID

98667

Publication Details

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

Abstract

2015 Taylor & Francis 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.