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Modeling ex-ante risk premia in the oil market

Author

Listed:
  • Remzi Uctum

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Georges Prat

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using survey-based data we show that oil price expectations are not rational, implying that the ex-ante premium is a more relevant concept than the widely popular expost premium. We propose for the 3-and 12-month horizons a portfolio choice model with risky oil assets and a risk-free asset. At the maximized expected utility the risk premium is defined as the risk price times the expected oil return volatility. A state-space model, where the risk prices are represented as stochastic unobservable components and where expected volatilities depend on historical squared returns, is estimated using Kalman filtering. We find that the representative investor is risk seeking at short horizons and risk averse at longer horizons. We examine the economic factors driving risk prices whose signs are shown to be consistent with the predictions of the prospect theory. An upward sloped term structure of oil risk premia prevails in average over the period.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Remzi Uctum & Georges Prat, 2021. "Modeling ex-ante risk premia in the oil market," Post-Print hal-03513121, HAL.
    • Handle: RePEc:hal:journl:hal-03513121
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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