The tail risk premium in the oil market

Reinhard Ellwanger

Energy Economics, 2025, vol. 141, issue C

Abstract: This paper studies tail risk and its option-implied risk compensation in the crude oil market. We identify economically large premia for upside and downside tail risks that significantly forecast crude oil futures returns. These premia are also reflected in the convenience yield for physical oil, which amplifies the predictive power for spot returns. Oil tail risk premia are not spanned by aggregate uncertainty measures, suggesting that shifts in market-specific risk attitudes contribute to commodity price volatility and return predictability.

Keywords: Tail risk; Options prices; Crude oil; Return predictability (search for similar items in EconPapers)
JEL-codes: C53 C58 D84 G13 Q41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:141:y:2025:i:c:s0140988324007503

DOI: 10.1016/j.eneco.2024.108041

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