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Risk-neutral moments in the crude oil market

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  • Ruan, Xinfeng
  • Zhang, Jin E.

Abstract

In this paper, we provide a comprehensive study on the higher-order risk-neutral moments (RNMs) and differences in RNMs (DRNMs) in the crude oil market, implied by options written on the United States Oil Fund (USO). Based on the t-statistic, the in-sample and the out-of-sample R2 statistics, we compare the USO return predictability and USO option return predictability by using RNMs and DRNMs from May 2007 to April 2016. We find that (i) all RNMs have a poor out-of-sample performance of predicting USO returns and simple option returns, while the risk-neutral volatility (VOL) outperforms in terms of both in-sample and out-of-sample predicting delta-hedged option returns; (ii) most of the DRNMs can significantly predict the future USO returns, and (iii) differences in the risk-neutral third cumulant (DTC) and differences in the risk-neutral fourth cumulant (DFC) are two important predictors for the future USO option returns.

Suggested Citation

  • Ruan, Xinfeng & Zhang, Jin E., 2018. "Risk-neutral moments in the crude oil market," Energy Economics, Elsevier, vol. 72(C), pages 583-600.
    • Handle: RePEc:eee:eneeco:v:72:y:2018:i:c:p:583-600
    DOI: 10.1016/j.eneco.2018.04.026
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    More about this item

    Keywords

    Risk-neutral moments; Crude oil; Option returns; Stock returns; Predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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