Risk Premia in Crude Oil Futures Prices

64 Pages Posted: 18 May 2013 Last revised: 26 Jan 2023

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: May 2013

Abstract

If commercial producers or financial investors use futures contracts to hedge against commodity price risk, the arbitrageurs who take the other side of the contracts may receive compensation for their assumption of nondiversifiable risk in the form of positive expected returns from their positions. We show that this interaction can produce an affine factor structure to commodity futures prices, and develop new algorithms for estimation of such models using unbalanced data sets in which the duration of observed contracts changes with each observation. We document significant changes in oil futures risk premia since 2005, with the compensation to the long position smaller on average in more recent data. This observation is consistent with the claim that index-fund investing has become more important relative to commerical hedging in determining the structure of crude oil futures risk premia over time.

Suggested Citation

Hamilton, James D. and Wu, Jing Cynthia, Risk Premia in Crude Oil Futures Prices (May 2013). NBER Working Paper No. w19056, Available at SSRN: https://ssrn.com/abstract=2266802

James D. Hamilton (Contact Author)

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Jing Cynthia Wu

University of Notre Dame - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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United States

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