Oil market modelling: a comparative analysis of fundamental and latent factor approaches

Mark Cummins, Michael Dowling, Fearghal Kearney

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)
9 Downloads (Pure)


We formally compare fundamental factor and latent factor approaches to oil price modelling. Fundamental modelling has a long history in seeking to understand oil price movements, while latent factor modelling has a more recent and limited history, but has gained popularity in other financial markets. The two approaches, though competing, have not formally been compared as to effectiveness. For a range of short- medium- and long-dated WTI oil futures we test a recently proposed five-factor fundamental model and a Principal Component Analysis latent factor model. Our findings demonstrate that there is no discernible difference between the two techniques in a dynamic setting. We conclude that this infers some advantages in adopting the latent factor approach due to the difficulty in determining a well specified fundamental model.

Original languageEnglish
Pages (from-to)211-218
Number of pages8
JournalInternational Review of Financial Analysis
Early online date8 Jun 2016
Publication statusPublished - 31 Jul 2016
Externally publishedYes


  • fundamental models
  • latent factors
  • oil futures
  • Vuong model comparison


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