FEEM working papers "Note di lavoro"
Date: 25/1/2018

Interpreting the Oil Risk Premium: do Oil Price Shocks Matter?

Daniele Valenti (University of Milan - Department of Economics, Management and Quantitative Methods); Matteo Manera (Fondazione Eni Enrico Mattei, University of Milan-Bicocca - Department of Economics, Management and Statistics); Alessandro Sbuelz (Catholic University of Milan - Department of Mathematical Sciences, Mathematical Finance and Econometrics)
JEL n.: Q40 ,Q41, Q43, E32
Keywords: Crude Oil Risk Premium, Bayesian SVAR Model, Oil Price Speculation


This paper provides an analysis of the link between the global market for crude oil and oil futures risk premium at the aggregate level. It offers empirical evidence on whether the compensation for risk required by the speculators depends on the type of the structural shock of interest. Understanding the response of the risk premium to unexpected changes in the price of oil can be useful to address some research questions, among which: what is the relationship between crude oil risk premium and unexpected rise in the price of oil? On average, what should speculators expect to receive as a compensation for the risk they are taking on? This work is based on a Structural Vector Autoregressive (SVAR) model of the crude oil market. Two main results emerge. First, the impulse response analysis provides evidence of a negative relationship between the risk premium and the changes in the price of oil triggered by shocks to economic fundamentals. Second, this analysis shows that the historical decline of the risk premium can be modelled as a part of endogenous effect of the oil market driven shocks.


Suggested citation: Valenti, D., M. Manera , A. Sbuelz, (2018), 'Interpreting the Oil Risk Premium: do Oil Price Shocks Matter?', Nota di Lavoro 3.2018, Milano, Italy: Fondazione Eni Enrico Mattei

Download file
Download PDF file

FEEM Newsletter & Update

Subscribe to stay connected.

Your personal data will be processed by Fondazione Eni Enrico Mattei. – data Controller – with the aim of emailing the FEEM newsletter & Update. The use of Your email address is necessary for the implementation of the newsletter service. You are invited to read the Privacy Policy in order to obtain additional information about the protection of Your rights.

This Website uses technical cookies and cookie analytics, as well as “third party” profiling cookies.
If you close this banner or you decide to continue navigating on this Website, you express consent to the use of cookies. If you need additional information or you wish to express selective choices on the use of cookies, please refer to the   Cookie PolicyI agree