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The tail risk premium in the oil market

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  • Ellwanger, Reinhard

Abstract

This paper studies tail risk and its option-implied risk compensation in the crude oil market. We identify economically large premia for upside and downside tail risks that significantly forecast crude oil futures returns. These premia are also reflected in the convenience yield for physical oil, which amplifies the predictive power for spot returns. Oil tail risk premia are not spanned by aggregate uncertainty measures, suggesting that shifts in market-specific risk attitudes contribute to commodity price volatility and return predictability.

Suggested Citation

  • Ellwanger, Reinhard, 2025. "The tail risk premium in the oil market," Energy Economics, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:eneeco:v:141:y:2025:i:c:s0140988324007503
    DOI: 10.1016/j.eneco.2024.108041
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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