What Insights Do Short-Maturity (7DTE) Return Predictive Regressions Offer about Risk Preferences in the Oil Market?

Gurdip Bakshi (), Xiaohui Gao and Zhaowei Zhang
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Gurdip Bakshi: Fox School of Business, Temple University, Philadelphia, PA 19122, USA
Xiaohui Gao: Fox School of Business, Temple University, Philadelphia, PA 19122, USA
Zhaowei Zhang: Fox School of Business, Temple University, Philadelphia, PA 19122, USA

Commodities, 2024, vol. 3, issue 2, 1-23

Abstract: In this study, we investigate the ability of three higher-order risk-neutral return cumulants to predict short maturity (weekly) returns of oil futures. Our data includes weekly West Texas Crude Oil futures options that expire in 7 days (7DTE). Using a model-free approach, we estimate these risk-neutral return cumulants at the beginning of each options expiration cycle. Our results suggest that the third risk-neutral return cumulant consistently predicts the returns of various oil futures (including WTI, Brent, Dubai, Heating Oil, and RBOB Gasoline). We compare our findings with 14 other predictors and offer a theoretical explanation for the negative coefficient observed for the 7DTE third risk-neutral return cumulant. Our theory connects higher-order risk-neutral return cumulants with the risk premiums of oil futures. Furthermore, our quantitative investment strategy favors the predictability of oil futures returns.

Keywords: weekly (7DTE) options on oil futures; 7DTE risk-neutral return cumulants; oil futures returns; return predictive regressions; jumps (search for similar items in EconPapers)
JEL-codes: C0 C1 C2 C3 C4 C5 C6 C7 C8 C9 D4 E3 E6 F0 F1 F3 F4 F5 F6 G1 O1 O5 Q1 Q2 Q4 (search for similar items in EconPapers)
Date: 2024
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