Capturing Energy Risk Premia

31 Pages Posted: 7 May 2019

See all articles by Adrian Fernandez-Perez

Adrian Fernandez-Perez

Auckland University of Technology

Ana-Maria Fuertes

Cass Business School, City University of London

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Date Written: April 9, 2019

Abstract

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

Fernandez-Perez, Adrian and Fuertes, Ana-Maria and Miffre, Joelle, Capturing Energy Risk Premia (April 9, 2019). Available at SSRN: https://ssrn.com/abstract=3368936 or http://dx.doi.org/10.2139/ssrn.3368936

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Joelle Miffre (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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