Capturing Energy Risk Premia
31 Pages Posted: 7 May 2019
Date Written: April 9, 2019
The article models the risk premium present in energy futures markets. This is done first by analyzing the performance of long-short portfolios based on single styles, and then by integrating these styles into an unique portfolio. Aligned with the hedging pressure hypothesis and the theory of storage, investors earn a premium of at least 7.5% a year for bearing hedgers’ risk of price fluctuation and for holding energy futures with low inventories. Integrating the signals into an unique portfolio increases the premium further to 12.4% a year. Out of all the integration approaches considered, the easiest one is also the best in term of performance; it merely consists of giving equal weights to the styles considered within the integrated portfolio. The results are robust to the consideration of transaction costs, alterative specifications of the integrated portfolio, data mining and various sub-periods.
Keywords: Energy futures markets, Risk premium, Long-short portfolios, Integration
JEL Classification: G13, G14
Suggested Citation: Suggested Citation