How Accurate are Futures Prices?: AnEmpiricalStudyoftheOilMarket
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
The aim of this study is to contribute to the knowledge at the Swedish Riksbank by comparing the price of futures contracts to the Random Walk model in order to determine which is superior when forecasting the future spot price of oil. This study also aims at analyzing the factors that affect the price of oil. The supply and demand of oil is considered to be the factors that affect the price of oil the most. Lin (2011) presents a simple model explaining the relationship between the supply and demand, which, in this study, is complemented with Hotelling’s rule. In addition, a numerical example is presented which shows the difference between the nominal price/barrel of WTI 3-month oil futures and the spot price on the maturity date of the futures. This is done in order to demonstrate the actual money gained or lost when investing in crude oil futures rather than buying oil on maturity. By this, I contribute to the existing research of both the Random Walk model as well as futures when forecasting the future spot price of oil.
The results of this study indicate that the price of crude oil futures are, in fact, superior to the Random Walk model when forecasting the future spot price of oil. However, the results also indicate that the futures are better to use when making forecasts in the near time than the long time. Furthermore, the results indicate that using futures solely as an indicator of the future direction of the price of oil might not be optimal as they, at any point in time, risk being very inaccurate.
Place, publisher, year, edition, pages
2014. , 39 p.
Oil price, Spot price, Crude oil futures, contracts, Random Walk model
Economics and Business
IdentifiersURN: urn:nbn:se:kth:diva-156052OAI: oai:DiVA.org:kth-156052DiVA: diva2:764288