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tiko
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Posts: 217
Joined: March 7th, 2003, 11:11 am

Stochastic Process for Oil

November 24th, 2010, 10:07 am

Hi, When simulating Oil what is the best Stochastic Process for Oil is it:Risk Neutral: dP=(RF-L)* P*dt+Sigma*P*dZ, where RF is risk free and L is convenience yieldor Mean Reversion: dx=n*(x-y)*dt+Sigma*dZ, where n is speed of conversion and x is the equilibrum levelWill appreciate the help,
 
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tagoma
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Joined: February 21st, 2010, 12:58 pm

Stochastic Process for Oil

December 5th, 2010, 1:27 pm

commodities modelling !!!!i am not sure there is a straightforward answer to the question what is the best stochastic model for oil price.and, one factor-model may be insufficient to lie good results ...here are some useful readings :"The Term Structures of Oil Futures Prices" by Gabillon is a reference paper :http://www.oxfordenergy.org/pdfs/WPM17.pdf"Energy Commodity Prices: Is Mean-Reversion Dead?"http://www.dm.unibo.it/ssf/2008/papers_ ... Stochastic Convenience Yield and the Pricing of Oil Contingent Claims"[Restrited access] http://www.jstor.org/pss/2328801in "Risk Management in Commodity Markets", Geman presents a mean reversion model with structural breakshttp://www.amazon.com/Risk-Management-Commodit ... 470694254i would advise the following book, from Geman, too :"Commodities and Commodity Derivatives: Modelling and Pricing for Agriculturals, Metals and Energy" don't earn the least buck nor with Geman's books nor with amazon.com )
 
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tiko
Topic Author
Posts: 217
Joined: March 7th, 2003, 11:11 am

Stochastic Process for Oil

December 5th, 2010, 4:07 pm

thx edouard for your reply, i found that most people prefer mean reversion with oil.......I am wondering that is the Stochastic Process for FX currencies, i do no think that mean reversion is fair to say for FOREX, may be an interest differential between the two currencies is more appropriate like blackscholes....is that correct????