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Risk factors and their associated risk premia: An empirical analysis of the crude oil market

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  • Hain, Martin
  • Uhrig-Homburg, Marliese
  • Unger, Nils

Abstract

This paper sheds new light on higher-order price risks in crude oil markets. A model-free analysis reveals that crude oil variance risk behaves fundamentally different from variance risk in equity markets. Most importantly, a skewness swap is no valid hedge for a variance swap and investors fear large price jumps in both directions. A model-based assessment confirms this and reveals that while stochastic volatility is important to capture the statistical properties such as volatility clusters and time-varying variance swap rates, only jump risk seems to be priced with a premium. Empirical evidence from a pricing and hedging exercise confirms these findings.

Suggested Citation

  • Hain, Martin & Uhrig-Homburg, Marliese & Unger, Nils, 2018. "Risk factors and their associated risk premia: An empirical analysis of the crude oil market," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 44-63.
    • Handle: RePEc:eee:jbfina:v:95:y:2018:i:c:p:44-63
    DOI: 10.1016/j.jbankfin.2017.10.007
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    Cited by:

    1. Manuel Ammann & Mathis Moerke & Marcel Prokopczuk & Christoph Matthias Würsig, 2023. "Commodity tail risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 168-197, February.
    2. Kang, Boda & Nikitopoulos, Christina Sklibosios & Prokopczuk, Marcel, 2020. "Economic determinants of oil futures volatility: A term structure perspective," Energy Economics, Elsevier, vol. 88(C).
    3. Alibeiki, Hedayat & Lotfaliei, Babak, 2022. "To expand and to abandon: Real options under asset variance risk premium," European Journal of Operational Research, Elsevier, vol. 300(2), pages 771-787.
    4. Hain, Martin & Kargus, Tobias & Schermeyer, Hans & Uhrig-Homburg, Marliese & Fichtner, Wolf, 2022. "An electricity price modeling framework for renewable-dominant markets," Working Paper Series in Production and Energy 66, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).

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    More about this item

    Keywords

    Risk premia; Option pricing; Stochastic volatility; Jumps; Unspanned volatility; Hedging;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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