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The Fundamental and Speculative Components of the Oil Spot Price: A Real Option Value Approach

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This paper investigates the recent evolution of the oil price, with the objective to analyze the main drivers that during last fifteen years have led the unstable path and the volatility persistence in the international oil market. We assume that the oil price is composed by two components, deterministic and speculative. The first one can be defined as the certain one, and it is referred to the fundamental component given by supply and demand interaction. Differently, the uncertain one is given by unclear changes in the price structure, and it is assumed to be linked to the speculative activity. Through a structural equation model (SEM) in a linear reduced form we find that the speculation in the oil market measured with the real option methodology can improve the traditional model explaining a consistent part of the oil fluctuations.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 229.

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Length: 39 pages
Date of creation: 18 Apr 2012
Date of revision: 18 Apr 2012
Handle: RePEc:rtv:ceisrp:229

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Keywords: structural model; oil price; speculation; volatility; option.;

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