Subordinated levy processes and applications to crude oil options
By: prepared by Noureddine Krichene.
Contributors: International Monetary Fund. African Dept.
Series: IMF working paper -- WP/05/174
Publisher: International Monetary Fund, African Dept.
Published: 2005
Place of publication: Washington, D.C
Language: eng
Number of pages: 25
Subjects: Petroleum industry and trade -- Econometric models.; Commodity exchanges -- Econometric models.; Petroleum products -- Prices -- Econometric models.
Description: One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices. This paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing. Calibration to crude oil futures' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures' level. These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.
Notes: "September 2005."

Includes bibliographical references (p. 24-25).

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