An empirical analysis of the risk premium in the crude oil futures market

Abstract

This paper investigates the unbiasedness of the crude oil futures price in two time periods: 1986-2019 and 2006-2019. The unbiasedness of the futures price is examined using linear regression in an in-sample setting and through assessing the predictive accuracy of alternative forecasting models, with different assumptions concerning the risk premium, in an out-of-sample setting. The results from the full time period (1986-2019) suggest that the futures price is an unbiased predictor of the future spot price of crude oil, indicating that there is no risk premium in the futures price. This finding is consistent in both the in- and out-of-sample analyses. The results from the sub-period (2006-2019) suggest that the futures price is a biased predictor of the future spot price of crude oil for medium-long maturities, indicating a risk premium in the futures price. However, whether the risk premium is constant and/or time-varying is inconclusive.