Journal of Banking & Finance Vol. 95 2018
Risk factors and their associated risk premia: An empirical analysis of the crude oil market
Abstract
This paper sheds new light on higher-order price risks in crude oil markets. A model-free analysis reveals that crude oil variance risk behaves fundamentally different from variance risk in equity markets. Most importantly, a skewness swap is no valid hedge for a variance swap and investors fear large price jumps in both directions. A model-based assessment confirms this and reveals that while stochastic volatility is important to capture the statistical properties such as volatility clusters and time-varying variance swap rates, only jump risk seems to be priced with a premium. Empirical evidence from a pricing and hedging exercise confirms these findings.
- DOI
- 10.1016/j.jbankfin.2017.10.007
- Volume
- 95
- Pages
- 44-63
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref