Oil market modelling : a comparative analysis of fundamental and latent factor approaches

Cummins, Mark and Dowling, Michael and Kearney, Fearghal (2016) Oil market modelling : a comparative analysis of fundamental and latent factor approaches. International Review of Financial Analysis, 46. pp. 211-218. ISSN 1057-5219 (https://doi.org/10.1016/j.irfa.2016.05.010)

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Abstract

We formally compare fundamental factor and latent factor approaches to oil price modelling. Fundamental modelling has a long history in seeking to understand oil price movements, while latent factor modelling has a more recent and limited history, but has gained popularity in other financial markets. The two approaches, though competing, have not formally been compared as to effectiveness. For a range of short- medium- and long-dated WTI oil futures we test a recently proposed five-factor fundamental model and a Principal Component Analysis latent factor model. Our findings demonstrate that there is no discernible difference between the two techniques in a dynamic setting. We conclude that this infers some advantages in adopting the latent factor approach due to the difficulty in determining a well specified fundamental model.

  • Item type:Article
    ID code:82393
    Dates:
    Date
    Event
    31 July 2016
    Published
    8 June 2016
    Published Online
    27 May 2016
    Accepted
    Subjects:Social Sciences > Finance
    Department:UNSPECIFIED
    Depositing user: Pure Administrator
    Date deposited:21 Sep 2022 10:50
    Last modified:09 Apr 2024 03:30
    Related URLs:
    URI:https://strathprints.strath.ac.uk/id/eprint/82393
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