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
Date Written: August 15, 2017
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: Suggested Citation