Oil jump risk

The risk premium associated with large upside jumps in oil market is a significant driver of the cross‐section of stock returns from 1986 to 2014. In contrast to previous research, variance risk is priced only when we do not control for jumps. Upward jumps are priced in tight supply‐demand conditions but not in more abundant supply periods. There is some evidence that downward jumps are priced in abundant supply conditions but not in tight conditions. Innovations in risk neutral jumps have predictive power for important economic indicators, including notably consumption growth. This helps explain the pricing of jump risks.