Higher moment risk premiums for the crude oil market: A downside and upside conditional decomposition

José Da Fonseca and Yahua Xu

Energy Economics, 2017, vol. 67, issue C, 410-422

Abstract: Relying on options written on the USO, an exchange traded fund tracking the daily price changes of the WTI light sweet crude oil, we extract variance and skew risk premiums in a model-free way. We further decompose these risk premiums into downside and upside conditional components and show that they can be partially explained by USO excess returns and, more importantly, these decomposed risk premiums enable a much better prediction of USO excess returns than the standard, or undecomposed, variance and skew risk premiums. A comparison with existing results for the equity index option market further confirms the usefulness of the decomposition for the crude oil market.

Keywords: Crude oil market; Variance risk premium; Skew risk premium; Conditional risk premiums; Forecasting (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:67:y:2017:i:c:p:410-422

DOI: 10.1016/j.eneco.2017.08.024

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