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What Insights Do Short-Maturity (7DTE) Return Predictive Regressions Offer about Risk Preferences in the Oil Market?
Bakshi, Gurdip Gao, Xiaohui Zhang, Zhaowei
Bakshi, Gurdip
Gao, Xiaohui
Zhang, Zhaowei
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Journal article
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2024-05-28
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Finance
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https://doi.org/10.3390/commodities3020014
Abstract
In this study, we investigate the ability of three higher-order risk-neutral return cumulants to predict short maturity (weekly) returns of oil futures. Our data includes weekly West Texas Crude Oil futures options that expire in 7 days (7DTE). Using a model-free approach, we estimate these risk-neutral return cumulants at the beginning of each options expiration cycle. Our results suggest that the third risk-neutral return cumulant consistently predicts the returns of various oil futures (including WTI, Brent, Dubai, Heating Oil, and RBOB Gasoline). We compare our findings with 14 other predictors and offer a theoretical explanation for the negative coefficient observed for the 7DTE third risk-neutral return cumulant. Our theory connects higher-order risk-neutral return cumulants with the risk premiums of oil futures. Furthermore, our quantitative investment strategy favors the predictability of oil futures returns.
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Bakshi, G.; Gao, X.; Zhang, Z. What Insights Do ShortMaturity (7DTE) Return Predictive Regressions Offer about Risk Preferences in the Oil Market? Commodities 2024, 3, 225–247. https://doi.org/10.3390/commodities3020014
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Commodities, Vol. 3, Iss. 2
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