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A Volatility Method of Crude Oil Dynamics: The Role of Market and Commodity Volatilities in Determining Equilibrium Prices

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  • boughabi, houssam

Abstract

This paper develops a volatility-based framework for crude oil pricing by examining the interaction between financial market volatility and commodity-specific risk. The spot price of oil is modeled as a linear combination of stock market and commodity volatilities, allowing the derivation of equilibrium conditions linking financial and commodity markets. Particular attention is given to the dynamics of the functions (A(t,T)) and (B(t,T)), whose evolution reveals a common trajectory consistent with equilibrium behavior between oil price volatility and underlying commodity risk. The analysis highlights the role of volatility transmission mechanisms in shaping commodity prices and provides a novel perspective on the connection between financial market fluctuations and real economic fundamentals. The findings contribute to the literature on commodity pricing by offering a volatility-driven approach that integrates market expectations and risk dynamics into the valuation of crude oil.

Suggested Citation

  • boughabi, houssam, 2025. "A Volatility Method of Crude Oil Dynamics: The Role of Market and Commodity Volatilities in Determining Equilibrium Prices," MPRA Paper 129471, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129471
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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