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Risk premia in crude oil futures prices

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  • Hamilton, James D.
  • Wu, Jing Cynthia

Abstract

If commercial producers or financial investors use futures contracts to hedge against commodity price risk, the arbitrageurs who take the other side of the contracts may receive compensation for their assumption of nondiversifiable risk in the form of positive expected returns from their positions. We show that this interaction can produce an affine factor structure to commodity futures prices, and develop new algorithms for estimation of such models using unbalanced data sets in which the duration of observed contracts changes with each observation. We document significant changes in oil futures risk premia since 2005, with the compensation to the long position smaller on average in more recent data. This observation is consistent with the claim that index-fund investing has become more important relative to commerical hedging in determining the structure of crude oil futures risk premia over time.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 42 (2014)
Issue (Month): C ()
Pages: 9-37

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Handle: RePEc:eee:jimfin:v:42:y:2014:i:c:p:9-37

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Oil prices; Speculation; Futures risk premium; Affine term structure models;

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References

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Cited by:
  1. Frankel, Jeffrey A., 2013. "Effects of Speculation and Interest Rates in a "Carry Trade" Model of Commodity Prices," Working Paper Series rwp13-022, Harvard University, John F. Kennedy School of Government.
  2. Jozef Barunik & Evzen Kocenda & Lukas Vacha, 2014. "How does bad and good volatility spill over across petroleum markets?," Papers 1405.2445, arXiv.org.
  3. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 71-87.

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