Oil Risk Premia under Changing Regimes
By Ilia Bouchouev, Ph.D., Managing Partner, Pentathlon Investments and Member of the GCARD’s Editorial Advisory Board; and Lingchao Zuo, Senior Quantitative Analyst, National Grid
Systematic commodity risk-premia strategies have been popular among asset allocators and extensively studied by researchers. It is not as widely known, though, that the disproportionally large share of returns in such diversified commodity portfolios is attributed to energy futures. We show that even simple signals supported by the economics of oil storage and transportation arbitrage generate superior returns when applied to oil futures alone. The challenge is to be mindful of structural regime shifts that are prevalent in oil markets.
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