Using Futures Prices to Filter Short-term Volatility and Recover a Latent, Long-term Price Series for Oil
AbstractOil prices are very volatile. But much of this volatility seems to reflect short-term, transitory factors that may have little or no influence on the price in the long run. Many major investment decisions should be guided by a model of the long-term price of oil and its dynamics. Data on futures prices can be used to filter out the short-term volatility and recover a time series of the latent, long-term price of oil. We test a leading model known as the 2-factor or short-term, long-term model. While the generated latent price variable is clearly an improvement over the raw spot oil price series, we also find that (1) the generated long-term price series still contains some of the short-term volatility, and (2) a naïve use of a long-maturity futures price as a proxy for the long-term price successfully filters out a large majority of the short-term volatility and so may be convenient alternative to the more cumbersome model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0605.
Date of creation: Apr 2006
Date of revision:
Contact details of provider:
Postal: 77 Massachusetts Ave. (Building E40-279), Cambridge, MA 02139-4307
Phone: (617) 253-3551
Fax: (617) 253-9845
Web page: http://tisiphone.mit.edu/RePEc
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-12 (All new papers)
- NEP-ENE-2006-08-12 (Energy Economics)
- NEP-FOR-2006-08-12 (Forecasting)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharmila Ganguly).
If references are entirely missing, you can add them using this form.