{
  "title": "Subordinated Levy Processes and Applications to Crude Oil Options",
  "publication": "IMF Working Papers, September 1, 2005",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/subordinated-levy-processes-and-applications-to-crude-oil-options-18459",
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  "summary": "One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- One approach to oil markets is to treat oil as an asset, besides its role as a commodity.\n- Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices.\n- The paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing.\n- Calibration to crude oil futures' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures' level.\n- These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility."
    },
    {
      "heading": "Methodology",
      "content": "- Proposes Levy processes to model uncertainty in crude oil prices and to price options on crude oil futures.\n- Calibration conducted to crude oil futures' options (details of calibration procedure are described in the working paper)."
    },
    {
      "heading": "Key Findings",
      "content": "- High volatility of oil futures prices is observed in the calibrated models.\n- Market expectations are fat-tailed.\n- Market expectations are right-skewed, implying a higher probability mass on crude oil prices remaining above the futures' level.\n- The behavior of investors’ demand for futures contracts can contribute to excessive price volatility."
    },
    {
      "heading": "Policy and Analytical Implications",
      "content": "- Recognizing crude oil both as a consumption good and as an investable asset is important for understanding price dynamics.\n- Derivatives market activity (both speculative and nonspeculative) can materially affect spot and futures price volatility.\n- Models that capture fat tails and skewness (such as subordinated Levy processes) provide better characterization of market expectations and risk for option pricing.\n\n---\n\n Content in this bundle\n\n- Crude oil prices density forecast on July, 5, 2005 for end-September 2005.\n  - Crude oil prices density forecast on July, 5, 2005 for end-September 2005. (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Crude oil prices density forecast on July, 5, 2005 for end-September 2005. (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/subordinated-levy-processes-and-applications-to-crude-oil-options-18459"
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    "Authors: Noureddine Krichene",
    "Published: September 1, 2005",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451861938.001",
    "One approach to oil markets is to treat oil as an asset, besides its role as a commodity.",
    "Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices.",
    "The paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing.",
    "Calibration to crude oil futures' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures' level.",
    "These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.",
    "Proposes Levy processes to model uncertainty in crude oil prices and to price options on crude oil futures.",
    "Calibration conducted to crude oil futures' options (details of calibration procedure are described in the working paper).",
    "High volatility of oil futures prices is observed in the calibrated models.",
    "Market expectations are fat-tailed.",
    "Market expectations are right-skewed, implying a higher probability mass on crude oil prices remaining above the futures' level.",
    "The behavior of investors’ demand for futures contracts can contribute to excessive price volatility.",
    "Recognizing crude oil both as a consumption good and as an investable asset is important for understanding price dynamics.",
    "Derivatives market activity (both speculative and nonspeculative) can materially affect spot and futures price volatility.",
    "Models that capture fat tails and skewness (such as subordinated Levy processes) provide better characterization of market expectations and risk for option pricing.",
    "**Crude oil prices density forecast on July, 5, 2005 for end-September 2005.**"
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      "title": "Crude oil prices density forecast on July, 5, 2005 for end-September 2005.",
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