The effect of crude oil futures price on risk premium volatilities in the futures market

Document Type: Original Article


1 associate professor, economics department, alzahra university

2 OFID, Vienna


This paper explores the impact of crude oil futures prices on risk premium volatilities in the NYMEX futures market. For this purpose, the ARCH and GARCH methods are used to model risk premium volatilities and explore how crude oil futures prices influence the risk premium volatilities in futures contract with a maturity of one-month, two-month and three-month over 1990-2014. In addition, it examines the impact of various maturities for futures contracts. The results indicate positive and statistically significant relationship between risk premium volatility and crude oil futures prices, and this relationship varies across the maturity length with change in maturity length. The longer the futures maturities, the higher the impact of futures crude oil prices on risk premium volatility is anticipated.


  • Alquist, Ron, Kilian, Lutz, 2010. What do we learn from the price of crude oil futures? Journal of Applied Econometrics 25, 539– 573.
  • Chernenko, S. V., Schwarz, K. B. andWright, J. H, : 2004, The Information Content of Forward and Futures Prices: Market expectations and the price of risk. Board of Governors of the Federal Reserve System, International Finance Discussion Papers, No. 808.
  • Chin M. D., M. LeBlanch and O. Coibion (2005), The Predictive Content of Energy Futures: An Update on Petroleum, Natural Gas, Heating Oil and Gasoline, NBER Working Paper 11033.
  • Chinn, M., LeBlanc, M. and Coibion, O, : 2005 “The Predictive Content of Energy Futures: An Update on Petroleum, Natural gas, Heating Oil and Gasoline” NBER Working Paper No. 11033, February.
  • De Roon, Frans, Nijman, Theo, Veld, Chris, 2000. Hedging pressure effects in futures markets. Journal of Finance 55, 1437–1456.
  • Engle, R. F., Lilien, D. M. and Russell, R. P.: “Estimating time varying risk premia in the term structure: the ARCH-M model”. Econometrica, 1987, vol. 55, No. 2, 391- 497.
  • Fan Ying , Yue-Jun Zhang, 2008,  Estimating ‘Value at Risk’ of crude oil price and its spillover effect using the GED-GARCH approach, DOI: 10.1016/j.eneco.2008.04.002.
  • Fattouh, Bassam, Kilian, Lutz, Mahadeva, Lavan, 2013. The role of speculation in oil markets: what have we learned so far? Energy Journal 34, 7–33.
  • Haase Marco and Heinz Zimmermann, 2013, Scarcity, Risk Premiums, and the Pricing of Commodity Futures: The Case of Crude Oil Contracts, The Journal of Alternative Investments Summer 2013, 16 (1) 43-71; DOI:
  • Hamilton James D., Wu Jing Cynthia, 2014, Risk premia in crude oil futures prices, Journal of International Money and Finance, Volume 42, April 2014, Pages 9-37
  • Irwin, Scott H., Sanders, Dwight R., 2012. Testing the masters hypothesis in commodity futures markets. Energy Economics 34, 256–269.
  • Jalali Naiini1 Ahmadreza ؛ Vahid Ghorbani Pashakolae؛ Mohamad Sayadi, 2013, Risk Spillover Effect between Oil Spot and Futures Price Returns, Iran Energy Economics Research Journal,  3(9): 31-52.
  • Keynes, John M., 1930. A Treatise on Money, vol. 2. Macmillan, London.
  • Kilian, Lutz, Murphy, Daniel P., 2013. The role of inventories and speculative trading in the global market for crude oil (forthcoming). Journal of Applied Econometrics.
  • Melolinna Marko, 2011, What explains risk premia in crude oil futures?, Bank of Finland Research, discussion Papers 2 • 2011.
  • Moosa A. Nabeel E. Al-Loughani, 1994, Unbiasedness and time varying risk premia in the crude oil futures market, Energy Economics, 1994, vol. 16, issue 2, 99-105.
  • Pindyck R.S.,2001, The dynamics of commodity spot and futures markets: A primer. The Energy Journal, 3 (1-22), 2001.