Risk factors and their associated risk premia: An empirical analysis of the crude oil market

Martin Hain, Marliese Uhrig-Homburg and Nils Unger

Journal of Banking & Finance, 2018, vol. 95, issue C, 44-63

Abstract: This paper sheds new light on higher-order price risks in crude oil markets. A model-free analysis reveals that crude oil variance risk behaves fundamentally different from variance risk in equity markets. Most importantly, a skewness swap is no valid hedge for a variance swap and investors fear large price jumps in both directions. A model-based assessment confirms this and reveals that while stochastic volatility is important to capture the statistical properties such as volatility clusters and time-varying variance swap rates, only jump risk seems to be priced with a premium. Empirical evidence from a pricing and hedging exercise confirms these findings.

Keywords: Risk premia; Option pricing; Stochastic volatility; Jumps; Unspanned volatility; Hedging (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:95:y:2018:i:c:p:44-63

DOI: 10.1016/j.jbankfin.2017.10.007

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