Capturing Energy Risk Premia
41 Pages Posted: 7 May 2019 Last revised: 3 May 2021
Date Written: April 9, 2019
This paper studies the energy futures risk premia that can be extracted through long-short portfolios that exploit heterogeneities across contracts as regards various characteristics or signals and integrations thereof. Investors can earn a sizeable premium of about 8% and 12% per annum by exploiting the energy futures contract risk associated with the hedgers’ net positions and roll-yield characteristics, respectively, in line with predictions from the hedging pressure hypothesis and theory of storage. Simultaneously exploiting various signals towards style-integration with alternative weighting schemes further enhances the premium. In particular, the style-integrated portfolio that equally weights all signals stands out as the most effective. The findings are robust to transaction costs, data mining and sub-period analyses.
Keywords: Energy futures markets, Risk premium, Long-short portfolios, Integration
JEL Classification: G13, G14
Suggested Citation: Suggested Citation