What Explains Risk Premiums in Crude Oil Futures?

21 Pages Posted: 3 Dec 2011

See all articles by Marko Melolinna

Marko Melolinna

Bank of Finland - Monetary Policy

Date Written: December 2011

Abstract

This paper studies the existence of risk premiums in crude oil futures prices with simple regression and Bayesian vector autoregressive models. It also studies the importance of three main risk premiums models in explaining and forecasting the risk premiums in practice. While the existence of the premiums and the validity of the models can be established at certain time points, it turns out that the choice of sample period has a considerable effect on the results. Hence, the risk premiums are highly time‐varying. The study also establishes a model, based on speculative positions in the futures markets, which has some predictive power for future oil spot prices.

Suggested Citation

Melolinna, Marko, What Explains Risk Premiums in Crude Oil Futures? (December 2011). OPEC Energy Review, Vol. 35, Issue 4, pp. 287-307, 2011, Available at SSRN: https://ssrn.com/abstract=1967814 or http://dx.doi.org/10.1111/j.1753-0237.2011.00201.x

Marko Melolinna (Contact Author)

Bank of Finland - Monetary Policy ( email )

PO Box 160
00101 Helsinki
Finland

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