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How Accurate are Futures Prices?: AnEmpiricalStudyoftheOilMarket
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.), Entrepreneurship and innovation.
2014 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

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.
Keyword [en]
Oil price, Spot price, Crude oil futures, contracts, Random Walk model
National Category
Economics and Business
URN: urn:nbn:se:kth:diva-156052OAI: diva2:764288
Available from: 2014-12-19 Created: 2014-11-18 Last updated: 2014-12-19Bibliographically approved

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