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 language | English |
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Pages (from-to) | 211-218 |
Journal | International Review of Financial Analysis |
Volume | 46 |
Early online date | 02 Jun 2016 |
DOIs | |
Publication status | Published - Jul 2016 |
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Profiles
-
Fearghal Kearney
- Queen's Management School - Senior Lecturer
- Finance
- Institute of Electronics, Communications & Information Technology
Person: Academic