The Fundamental and Speculative Components of the Oil Spot Price: A Real Option Value Approach
Dicembrino ClaudioScandizzo Pasquale Lucio
CEIS Research Paper
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.
Number: 229
Keywords: structural model, oil price, speculation, volatility, option.
JEL codes: C26, C53, Q41, Q47
Date: Wednesday, April 18, 2012
Revision Date: Wednesday, April 18, 2012