 A methodology for the choice of the best fitting continuous-time stochastic models of crude oil priceBilel Kaffel and Fathi Abid The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 3, 971-1000 Abstract: The crude oil price is generally considered as the fundamental factor in the valuation of undeveloped reserves but it is not the unique one. Undeveloped field value also depends on the uncertainty relating to the convenience yield and the risk-free interest rate. The purpose of this paper is to decide on the best continuous-time stochastic models for these risk factors. The Generalized Method of Moments and the Maximum Likelihood Estimation are implemented to fit the parameters of continuous-time stochastic processes. The results of unit root tests without breaks reveal a mean reversion in convenience yield series. Multiple structural change tests show that the risk-free interest rate can be considered constant. The simulation of continuous-time stochastic processes and the mean error between the simulated prices and the market ones show that the Geometric Brownian Motion with jumps is the best model for the oil price compared to the other commonly used processes. Keywords: Stochastic; processes; Multiple; structural; change; tests; Oil; price; GMM; and; MLE; estimation; Simulation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:49:y:2009:i:3:p:971-1000 Access Statistics for this article The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty More articles in The Quarterly Review of Economics and Finance from Elsevier |
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