The bulk modulus of pure hydraulic oil and its dependency on pressure and temperature has been studied extensively over the past years. A comprehensive review of some of the more common definitions of fluid bulk modulus is conducted and comments on some of the confusion over definitions and different methods of measuring the fluid bulk modulus are presented in this thesis. In practice, it is known that there is always some form of air present in hydraulic systems which substantially decreases the oil bulk modulus. The term effective bulk modulus is used to account for the effect of air and/or the compliance of transmission lines. A summary from the literature of the effective bulk modulus models for a mixture of hydraulic oil and air is presented. Based on the reviews, these models are divided into two groups: “compression only” models and “compression and dissolve” models. A comparison of various “compression only” models, where only the volumetric compression of air is considered, shows that the models do not match each other at the same operating conditions. The reason for this difference is explained and after applying some modifications to the models, a theoretical model of the “compression only” model is suggested. The “compression and dissolve” models, obtained from the literature review, include the effects of the volumetric compression of air and the volumetric reduction of air due to the dissolving of air into the oil. It is found that the existing “compression and dissolve” models have a discontinuity at some critical pressure and as a result do not match the experimental results very well. The reason for the discontinuity is discussed and a new “compression and dissolve” model is proposed by introducing some new parameters to the theoretical model. A new critical pressure (PC) definition is presented based on the saturation limit of oil. In the new definition, the air stops dissolving into the oil after this critical pressure is reached and any remaining air will be only compressed afterwards. An experimental procedure is successfully designed and fabricated to verify the new proposed models and to reproduce the operating conditions that underlie the model assumptions. The pressure range is 0 to 6.9 MPa and the temperature is kept constant at °C. Air is added to the oil in different forms and the amount of air varies from about 1 to 5%. Experiments are conducted in three different phases: baseline (without adding air to the oil), lumped air (air added as a pocket of air to the top of the oil column) and distributed air (air is distributed in the oil in the form of small air bubbles). The effect of different forms and amounts of air and various volume change rates are investigated experimentally and it is shown that the value of PC is strongly affected by the volume change rate, the form, and the amount of air. It is also shown that the new model can represent the experimental data with great accuracy. The new proposed “compression and dissolve” model can be considered as a general model of the effective bulk modulus of a mixture of oil and air where it is applicable to any form of a mixture of hydraulic oil and air. However, it is required to identify model parameters using experimental measurements. A method of identifying the model parameters is introduced and the modeling errors are evaluated. An attempt is also made to verify independently the value of some of the parameters. The new proposed model can be used in analyzing pressure variations and improving the accuracy of the simulations in low pressure hydraulic systems. The new method of modeling the air dissolving into the oil can be also used to improve the modeling of cavitation phenomena in hydraulic systems.