This paper explores the impact of investor flows and financial market conditions on returns in crude-oil futures markets. I argue that informational frictions and the associated speculative activity may induce prices to drift away from “fundamental” values, and may result in booms and busts in prices. Particular attention is given to the interplay between imperfect information about real econom...

This paper proposes a profit model for spread trading by focusing on the stochastic movement of the price spread and its first hitting time probability density. The model is general in that it can be used for any financial instrument. The advantage of the model is that the profit from the trades can be easily calculated if the first hitting time probability density of the stochastic process is ...

April 2015 Abstract We present evidence that the aggregate capital stock of firms in oil and gas exploration and development (E&D) as well as firms’ inventories help in explaining the dynamics of the slope of the futures curve for crude oil. Standard structural approaches for modeling the futures curve either highlight the role of inventory (storage models) or the rate of extraction (production...

a r t i c l e i n f o Keywords: Multivariate GARCH model Optimal hedge ratio Market noise conditional volatility This paper introduces a new incomplete index and establishes a new optimal hedging model. We find that when the market micro-noise is perfectly negatively correlated with the return of futures market, market incomplete-ness depends on the relative level of noise volatility. Especiall...

Basis = price of hedged asset-price of hedging instrument problem of basis risk: uncertainties of processes describing the evolution of prices of asset and hedging instrument not identical, only highly correlated Example 1: weather derivatives hedged asset: heating oil sales, hedging instrument: HDD derivative HDD derivative: contract paying a premium in case HDD above a critical threshold Exam...

This paper constructs a macro-finance model for commodity futures, and documents a new empirical fact that real economic activity forecasts oil futures returns and prices. The model generalizes previous futures pricing models and indicates a time-varying oil risk premium that covaries strongly with the business cycle. Model estimates reveal rich dynamics between economic activity and oil future...

We analyze mean-variance-optimal dynamic hedging strategies in oil futures for oil producers and consumers. In a model for the oil spot and futures market with Gaussian convenience yield curves and a stochastic market price of risk, we find analytical solutions for the optimal trading strategies. An implementation of our strategies in an out-of-sample test on market data shows that the hedging ...

The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. ABSTRACT We conduct a comprehensive analysis of unspanned stochastic volatility in commodity markets in general and the crude-oil market in particular. We present model-free results that strongly suggest the presence of unspanned stochastic volatility in th...

Working Papers are a series of manuscripts in their draft form. They are not intended for circulation or distribution except as indicated by the author. For that reason Working Papers may not be reproduced or distributed without the written consent of the author. Abstract This paper examines investor preferences for oil spot and futures based on mean-variance (MV) and stochastic dominance (SD)....

This paper studies the behavior of crude oil spot and futures prices. Oil prices, particularly spot and short-term futures prices, appear to have switched from I(0) to I(1) in early 2000s. To better understand this apparent change in persistence, a factor model of oil prices is proposed, where the prices are decomposed into long-term and short-term components. The change in the persistence beha...