Futures risk premia in the era of shale oil

Fabrizio Ferriani, Filippo Natoli, Giovanni Veronese and Federica Zeni

MPRA Paper from University Library of Munich, Germany

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.

Keywords: shale oil; futures; risk premium; hedging; speculation; limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G00 G13 G32 Q43 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-ene, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:89097

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