Analyzing Oil Futures with a Dynamic Nelson-Siegel Model

Niels S. Hansen (nhansen@creates.au.dk) and Asger Lunde (alunde@econ.au.dk)
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Niels S. Hansen: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Asger Lunde: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In this paper we are interested in the term structure of futures contracts on oil. The objective is to specify a relatively parsimonious model which explains data well and performs well in a real time out of sample forecasting. The dynamic Nelson-Siegel model is normally used to analyze and forecast interest rates of different maturities. The structure of oil futures resembles the structure of interest rates and this motivates the use of this model for our purposes. The data set is vast and the dynamic Nelson-Siegel model allows for a significant dimension reduction by introducing three factors. By performing a series of cross-section regressions we obtain time series for these factors and we focus on modeling their joint distribution. Using copula decomposition we can set up a model for each factor individually along with a model for their dependence structure. When a reasonable model for the factors has been specified it can be used to forecast prices of futures contracts with different maturities. The outcome of this exercise is a class of models which describes the observed futures contracts well and forecasts better than conventional benchmarks. We carry out a real time value at risk analysis and show that our class of models performs well.

Keywords: Oil futures; Nelson-Siegel; Normal Inverse Gaussian; GARCH; Copula. (search for similar items in EconPapers)
JEL-codes: C32 C53 G17 (search for similar items in EconPapers)
Pages: 39
Date: 2013
New Economics Papers: this item is included in nep-ecm, nep-ene and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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