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.
|Journal||International Review of Financial Analysis|
|Early online date||02 Jun 2016|
|Publication status||Published - Jul 2016|
FingerprintDive into the research topics of 'Oil Market Modelling: A Comparative Analysis of Fundamental and Latent Factor Approaches'. Together they form a unique fingerprint.
- Queen's Management School - Senior Lecturer
- Institute of Electronics, Communications & Information Technology