An N-Factor Gaussian Model of Oil Futures Prices
Cortazar, G. and Naranjo, L. (2006), An N-factor Gaussian model of oil futures prices. J. Fut. Mark., 26: 243–268.
Posted: 2 Mar 2005 Last revised: 3 Feb 2023
Date Written: February 1, 2005
This paper studies the ability of an N-factor Gaussian model to explain the stochastic behavior of oil futures prices when estimated using all available price information, as opposed to traditional approaches of aggregating data for a set of maturities. A Kalman filter estimation procedure that allows for a time-dependent number of daily observations is used to calibrate the model. When applied to all daily oil futures price transactions from 1992 to 2001, the model performs very well requiring at least three factors to explain the term structure of futures prices, but four factors to fit the volatility term structure. The model also performs very well for daily copper futures transactions from 1992 to 2001 and for out-of-sample daily oil futures transactions from 2002 to 2004.
Keywords: Commodity futures, oil prices, Kalman filter
JEL Classification: G13
Suggested Citation: Suggested Citation