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Futures risk premia in the era of shale oil

Author

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  • Ferriani, Fabrizio
  • Natoli, Filippo
  • Veronese, Giovanni
  • Zeni, Federica

Abstract

The advent of shale oil in the United States triggered a structural transformation in the oil market. We show, both theoretically and empirically, that this process has relevant consequences on oil risk premia. We construct a consumption-based model with shale producers interacting with financial speculators in the futures market. Compared to conventionals, shale producers have a more flexible technology, but higher risk aversion and additional costs due to their reliance on external finance. Our model helps to explain the observed pattern of aggregate hedging by US firms in the last decade. The empirical analysis shows that the hedging pressure of shale producers has become more relevant than that of conventional producers in explaining the oil futures risk premium.

Suggested Citation

  • Ferriani, Fabrizio & Natoli, Filippo & Veronese, Giovanni & Zeni, Federica, 2018. "Futures risk premia in the era of shale oil," MPRA Paper 89097, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89097
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    References listed on IDEAS

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    Cited by:

    1. Ferriani, Fabrizio & Veronese, Giovanni, 2018. "U.S. shale producers: a case of dynamic risk management?," MPRA Paper 88279, University Library of Munich, Germany.

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    More about this item

    Keywords

    shale oil; futures; risk premium; hedging; speculation; limits to arbitrage;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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