Developing and Applications of an Economic Model for World Crude Oil/Natural Gas Market
Published in March 2019
Crude oil and natural gas have played a crucial role in our whole economy. In particular, the movement of oil price would give significant impacts to the economic condition. Despite that, the evaluation of macroeconomic performance in both empirical and theoretical analysis tends to rely on a common approach in which oil price or other commodity prices are assumed to be treated as exogenous variables. It implies that the interrelation between commodity prices and economy is ignored. However, as Barsky and Kilian (2004) emphasize, we believe that the oil prices should be endogenous in economic models.
This interim report aims to represent modeling approaches for commodity spot market (real market) including crude oil, natural gas, iron ore, and coking coal.
The rest of this paper is composed of four parts. Section 2 gives an overview of international commodity markets. Section 3 illustrates the basic framework in which crude oil spot price is determined, based on an assumption about the demand and supply in crude oil market. In addition, following this framework, we describe models for other commodity spot prices such as natural gas, iron ore and coking coal as well as crude oil. We also show empirical estimation results partially. Finally, Section 4 shows concluding remarks of this paper.
Changes in crude oil price affect inflation, output, and economic growth. The development of derivative markets makes it difficult to predict commodity prices. Prediction of the crude oil price plays an important role in conducting monetary policy. Therefore, it has been increasingly importance to clarify the price determination mechanism of futures prices and spot prices and forecast as accurately as possible (Greenspan, 2004, 2005; Bernanke 2004, 2006, Kohn, 2007)
In this interim report, we provide an overview of modeling approaches for commodity future market by shedding light on the relation between the spot price and the futures price and Futures transactions are part of the derivative financial instruments which include forward, options and swaps, but this paper focuses only on futures market.
Specifically, the rest of this paper is composed of four parts. Section 2 refers some representative the model for future commodity market. In particular, we cover the important models: a model based on the theory the Cost-of-Carry, a model based on the Risk Premium such as Capital Asset Pricing Model (CAPM), and the Black and Scholes Model (BS), and Neural Network etc. We also show some empirical estimation results. Finally, Section 4 concludes this paper.