Ehud Ronn Explores a Different Way to Forecast Oil Prices

Forecasting oil prices is a complex process that requires a fundamental analysis from the bottom up. But according to Ehud Ronn, Professor of Finance at the McCombs School of Business, it does not have to be so hard. Ronn has developed an easy-to-understand financial economics approach to forecasting oil prices that uses what the markets are telling us about the future of the economy. By letting the market do the aggregation, Ronn’s model can take a very small number of inputs and produce a reasonable prediction. The model consists of just three components:

  1. Correlation: a measure of the co-movement between the year-ahead futures contract and the US stock market
  2. Implied Volatility: a measure of the uncertainty that pertains to oil prices
  3. Sharpe Ratio: the compensation for unit risk in the stock market

Ronn’s model, while consisting of fewer components than traditional models, forecasts comparably to the more complex methods.

See how Dr. Ronn’s model operates first hand in Energy Finance on October 14th.