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Stochastic Models for Oil Prices and the Pricing of Futures on Oil

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  • Mohammed A. Aba Oud
  • Joanna Goard

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.

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  • Mohammed A. Aba Oud & Joanna Goard, 2015. "Stochastic Models for Oil Prices and the Pricing of Futures on Oil," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(2), pages 189-206, April.
    • Handle: RePEc:taf:apmtfi:v:22:y:2015:i:2:p:189-206
    DOI: 10.1080/1350486X.2015.1005281
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    Cited by:

    1. Fehaid Salem Alshammari, 2024. "Novel Numerical Investigation of Reaction Diffusion Equation Arising in Oil Price Modeling," Mathematics, MDPI, vol. 12(8), pages 1-17, April.
    2. Mohammed A. Aba Oud & Joanna Goard, 2015. "Valuation Of Options On Oil Futures Under The 3/4 Oil Price Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(08), pages 1-12, December.
    3. Armstrong, Margaret & Langrené, Nicolas & Petter, Renato & Chen, Wen & Petter, Carlos, 2019. "Accounting for tailings dam failures in the valuation of mining projects," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    4. Joanna Goard & Mohammed AbaOud, 2023. "A Bimodal Model for Oil Prices," Mathematics, MDPI, vol. 11(10), pages 1-26, May.

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