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What explains risk premiums in crude oil futures? *
Author(s) -
Melolinna Marko
Publication year - 2011
Publication title -
opec energy review
Language(s) - English
Resource type - Journals
eISSN - 1753-0237
pISSN - 1753-0229
DOI - 10.1111/j.1753-0237.2011.00201.x
Subject(s) - futures contract , economics , econometrics , autoregressive model , crude oil , predictive power , spot contract , risk premium , sample (material) , heating oil , financial economics , engineering , philosophy , chemistry , epistemology , chromatography , waste management , petroleum engineering
This paper studies the existence of risk premiums in crude oil futures prices with simple regression and Bayesian vector autoregressive models. It also studies the importance of three main risk premiums models in explaining and forecasting the risk premiums in practice. While the existence of the premiums and the validity of the models can be established at certain time points, it turns out that the choice of sample period has a considerable effect on the results. Hence, the risk premiums are highly time‐varying. The study also establishes a model, based on speculative positions in the futures markets, which has some predictive power for future oil spot prices.