Title: Oil jump risk
Authors: Craig Pirrong - University of Houston (United States) [presenting]
Nima Ebrahimi - University of Houston (United States)
Abstract: The aim is to evaluate (a) the predictive power of oil price jump risk premia, and (b) whether these risk premia are priced in the cross-section of stock returns. We find that upside and downside jump risk premia extracted from crude oil futures prices have considerable power to predict economic indicators including GDP growth, consumption growth, and investment. The upside jump premium also has some power to predict equity index returns and oil futures returns. Further, prior to 2011, the upside jump premium is a driver of the cross-sections of equity returns. After controlling for the oil jump risk premium, the oil variance risk premium (which has been found to be priced in some previous research) is no longer explains the cross-section of stock returns.