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Time-Varying Term Structure of Oil Risk Premia

Author

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  • Gonzalo Cortazar
  • Philip Liedtke
  • Hector Ortega
  • Eduardo S. Schwartzd

Abstract

We develop a framework to estimate time-varying commodity risk premia from multi-factor models using futures prices and analysts’ forecasts of future prices. The model is calibrated for oil using a 3-factor stochastic commodity-pricing model with an affine risk premia specification. The WTI oil futures price data is from the New York Mercantile Exchange (NYMEX) and analysts’ forecasts are from Bloomberg and the U.S Energy Information Administration. Weekly estimations for short, medium, and long-term risk premia between 2010 and 2017 are obtained. Results from the model calibration show that the term structure of oil risk premia moves stochastically through time, that short-term risk premia tend to be higher than long-term ones and that risk premia volatility is much higher for short maturities. An empirical analysis is performed to explore the macroeconomic and oil market variables that may explain the stochastic behavior of oil risk premia, showing that inventories, hedging pressure, term premium, default premium and the level of interest rates all play a significant role in explaining the risk premia.

Suggested Citation

  • Gonzalo Cortazar & Philip Liedtke & Hector Ortega & Eduardo S. Schwartzd, 2022. "Time-Varying Term Structure of Oil Risk Premia," The Energy Journal, , vol. 43(5), pages 71-92, September.
    • Handle: RePEc:sae:enejou:v:43:y:2022:i:5:p:71-92
    DOI: 10.5547/01956574.43.5.gcor
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    References listed on IDEAS

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    1. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Ramaprasad Bhar & Damien Lee, 2011. "Time‐varying market price of risk in the crude oil futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(8), pages 779-807, August.
    3. Bernard, Jean-Thomas & Khalaf, Lynda & Kichian, Maral & Yelou, Clement, 2018. "Oil Price Forecasts For The Long Term: Expert Outlooks, Models, Or Both?," Macroeconomic Dynamics, Cambridge University Press, vol. 22(3), pages 581-599, April.
    4. Jefferson Duarte, 2004. "Evaluating an Alternative Risk Preference in Affine Term Structure Models," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 379-404.
    5. Gonzalo Cortazar & Cristobal Millard & Hector Ortega & Eduardo S. Schwartz, 2019. "Commodity Price Forecasts, Futures Prices, and Pricing Models," Management Science, INFORMS, vol. 65(9), pages 4141-4155, September.
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