The Fundamental and Speculative Components of the Oil Spot Price: A Real Option Value Approach

39 Pages Posted: 20 Apr 2012

See all articles by Claudio Dicembrino

Claudio Dicembrino

Department of Strategic Planning

Pasquale L. Scandizzo

University of Rome

Date Written: March 16, 2012

Abstract

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 fi rst one can be defi ned as the certain one, and it is referred to the fundamental component given by supply and demand interaction. Di fferently, 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.

Keywords: structural model, oil price, speculation, volatility, option

JEL Classification: C26, C53, Q41, Q47

Suggested Citation

Dicembrino, Claudio and Scandizzo, Pasquale Lucio, The Fundamental and Speculative Components of the Oil Spot Price: A Real Option Value Approach (March 16, 2012). CEIS Working Paper No. 229, Available at SSRN: https://ssrn.com/abstract=2043158 or http://dx.doi.org/10.2139/ssrn.2043158

Claudio Dicembrino

Department of Strategic Planning ( email )

Viale Regina Margherita 137
Rome, RM 00198
Italy

Pasquale Lucio Scandizzo (Contact Author)

University of Rome ( email )

Via Columbia, 2
Rome, I-00133
Italy
+3906/72595929 (Phone)
+3906/2040219 (Fax)

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