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Oil price dynamics (2002-2006)



Oil price dynamics during 2002-2006 have been characterized by high volatility, high intensity jumps, and strong upward drift, and were concomitant with underlying fundamentals of oil markets and world economy; namely, pressure on oil prices resulting from rigid crude oil supply and expanding world demand for crude oil. A change in the oil price process parameters would require a change in underlying fundamentals. Market expectations, extracted from call and put option prices, anticipated no change in underlying fundamentals in the short term. Markets expected oil prices to remain volatile and jumpy, and with higher probabilities, to rise, rather than fall, above the expected mean.

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