Modeling the Correlation Function in the Crude-Oil Futures Market

Numerous participants in the energy industry require the computation of coefficients of correlation in a large-industry portfolio. Addressing the specifics of the crude-oil futures contracts, this paper proposes and implements a simple intuitive procedure that reduces the cross-maturity correlations in crude-oil futures to the estimation of two parameters. We argue this procedure is more intuitive than the traditional statistical solution of principal-components analysis