Risk premium, price of risk and expected volatility in the oil market: Evidence from survey data

Georges Prat and Remzi Uctum ()
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Georges Prat: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Remzi Uctum: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper contributes to the literature on crude oil risk premiums by providing ex-ante measures of these premiums using survey oil price expectations over an extended period. These ex-ante premiums are uncorrelated with ex-post premiums commonly used in existing studies, whereas they are more relevant as they directly influence investors' decision-making. Utilizing a portfolio choice model, we explain the ex-ante premium as the product of the price of risk and the expected variance, both varying over time and across horizons. We estimate this relationship using a multivariate state-space framework. From our estimated risk prices we find, on average, that investors exhibit risk-seeking behaviour in the short term and risk aversion in the long term. It follows that the term structure of oil risk premiums are prominently upward-sloping. Additionally, consistent with the prospect theory, investors are found to be predominantly risk averse in a context of expected gains and risk-seeking in a context of expected losses. Finally, the dynamics of risk prices are shown to be driven by identifiable economic, financial, and oil market-related factors.

Keywords: Oil price expectations; Ex-ante oil risk premium; Survey data; Prospect theory; D81; G11; Q43 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-ene, nep-rmg and nep-upt
Note: View the original document on HAL open archive server: https://hal.science/hal-04873466v1
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Published in Energy Economics, 2024, 140, pp.107930. ⟨10.1016/j.eneco.2024.107930⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04873466

DOI: 10.1016/j.eneco.2024.107930

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