Oil Market Modelling: A Comparative Analysis of Fundamental and Latent Factor Approaches

Mark Cummins, Michael Dowling, Fearghal Kearney

Research output: Contribution to journalArticle

3 Citations (Scopus)
263 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)211-218
JournalInternational Review of Financial Analysis
Volume46
Early online date02 Jun 2016
DOIs
Publication statusPublished - Jul 2016

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