Oil Prices and Long-Run Risk

65 Pages Posted: 6 Dec 2010 Last revised: 15 Oct 2016

See all articles by Robert C. Ready

Robert C. Ready

University of Oregon - Department of Finance

Date Written: May 10, 2012

Abstract

I add an oil good endowment to the Long-Run Risk model of Bansal and Yaron (2004) to study the asset pricing implications of a constrained oil supply. Lack of responsiveness of the oil endowment changes both the physical and risk-neutral dynamics of oil prices, and explains significant differences in the observed behavior of oil futures prices and returns from 2004 to 2008 relative to the prior 15 years. The model predicts that an unresponsive oil supply increases the risk of exogenous oil shocks, but mitigates risk from other shocks to growth, thereby lowering overall economic risk and the equity premium.

Keywords: Oil, Long-Run Risk

Suggested Citation

Ready, Robert C., Oil Prices and Long-Run Risk (May 10, 2012). Available at SSRN: https://ssrn.com/abstract=1720502 or http://dx.doi.org/10.2139/ssrn.1720502

Robert C. Ready (Contact Author)

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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