Higher Moment Risk Premiums for the Crude Oil Market: A Downside and Upside Conditional Decomposition

41 Pages Posted: 22 Dec 2016 Last revised: 2 Sep 2017

See all articles by José Da Fonseca

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law

Yahua Xu

Central University of Finance and Economics (CUFE) - China Economics and Management Academy

Date Written: August 15, 2017

Abstract

Relying on options written on the USO, an exchange traded fund tracking the daily price changes of the WTI light sweet crude oil, we extract variance and skew risk premiums in a model-free way. We further decompose these risk premiums into downside and upside conditional components and show that they are time varying; that they can be partially explained by USO excess returns and, more importantly, these decomposed risk premiums enable a much better prediction of USO excess returns than the standard, or undecomposed, variance and skew risk premiums.

Keywords: Crude Oil Market; Variance Risk Premium; Skew Risk Premium; Conditional Risk Premiums; Forecasting

JEL Classification: G11; G12; G13

Suggested Citation

Da Fonseca, José and Xu, Yahua, Higher Moment Risk Premiums for the Crude Oil Market: A Downside and Upside Conditional Decomposition (August 15, 2017). Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2888147 or http://dx.doi.org/10.2139/ssrn.2888147

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand
64 9 921 9999 5063 (Phone)

Yahua Xu (Contact Author)

Central University of Finance and Economics (CUFE) - China Economics and Management Academy ( email )

NO.39 South College Road
Haidian District
Beijing, 100081
China

Register to save articles to
your library

Register

Paper statistics

Downloads
97
Abstract Views
562
rank
272,900
PlumX Metrics