Recent Dynamics of Crude Oil Prices

Noureddine Krichene

No 2006/299, IMF Working Papers from International Monetary Fund

Abstract: Crude oil prices have been on a run-up spree in recent years. Their dynamics were characterized by high volatility, high intensity jumps, and strong upward drift, indicating that oil markets were constantly out-of-equilibrium. An explanation of the oil price process in terms of the underlying fundamentals of oil markets and world economy was provided, viewing pressure on oil prices mainly as a result of rigid crude oil supply and an expanding world demand for crude oil. A change in the oil price process parameters would require a change in the underlying fundamentals. Market expectations, extracted from call and put option prices, anticipated no change, in the short term, in the underlying fundamentals. Markets expected oil prices to remain volatile and jumpy, and with higher probabilities, to rise, rather than fall, above the expected mean.

Keywords: WP; futures price; Fourier transform; Characteristic function; crude oil; cumulants; drift; Fourier inversion; jump-diffusion; kurtosis; option pricing; skewness; variance-gamma distribution; volatility; price inelasticity; return process; price process; price effect; price density; inelasticities of oil demand and supply; oil price dynamics; state price density; oil price density; modeling asset price; price inelasticities of oil demand and supply; option value; Oil prices; Oil; Asset prices; Options; Futures (search for similar items in EconPapers)
Pages: 28
Date: 2006-12-01
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Citations: View citations in EconPapers (7)

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