FEEM working papers "Note di lavoro" series
2018 .003

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


Autori: Daniele Valenti, Matteo Manera, Alessandro Sbuelz
Serie: Economic Theory and Applications
Editor: Matteo Manera
Parole chiave: Crude Oil Risk Premium, Bayesian SVAR Model, Oil Price Speculation
Numero JEL: Q40 ,Q41, Q43, E32

Abstract

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 off ers 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 eff ect of the oil market driven shocks.

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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

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