TIME-VARYING MARKET PRICE OF RISK AND AUTOREGRESSIVE ERROR STRUCTURE OF OIL PRICES
DOI:
https://doi.org/10.25115/eae.v38i1.2950Keywords:
Commodity models, market price of risk, Kalman filter, oil prices.Abstract
In this paper we investigate the inclusion of a time-varying market price of risk in oil price factor models. Additionally an autoregressive error structure is adopted to filter this property of financial series. We use the Schwartz and Smith model, which is well established in the literature on commodity prices. The analysis is easily extended to different types of factor models. The empirical application considered the future oil contracts traded on the NYMEX. We find that considering a time-varying market price of risk and the autoregressive structure improves the fit of the empirical data.
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References
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