Time-varying market price of risk in the crude oil futures market

In this study, a three‐factor model of crude oil prices is estimated, which incorporates a time‐varying market price of risk. The model is able to accurately capture the term structure of futures prices with evidence suggesting that risk premiums in the crude oil market are time‐varying. Using the c...

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Bibliographic Details
Published in:The journal of futures markets 2011-08, Vol.31 (8), p.779-807
Main Authors: Bhar, Ramaprasad, Lee, Damien
Format: Article
Language:English
Subjects:
Asset pricing
Crude oil
Crude oil prices
Derivatives
Economic forecasts
Energy prices
Estimation
Futures
Futures market
GARCH models
Market prices
Mathematical finance
Oil price
Risk premiums
Studies
Time series
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Summary:In this study, a three‐factor model of crude oil prices is estimated, which incorporates a time‐varying market price of risk. The model is able to accurately capture the term structure of futures prices with evidence suggesting that risk premiums in the crude oil market are time‐varying. Using the cross‐section of futures prices, we estimate a time‐series of the market price of risk in the crude oil market implied by the model. We find that the risk premiums in the crude oil market are driven by the same risk factors as equity and bond markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:779–807, 2011
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.20493