The tail risk premium in the oil market

This paper studies tail risk and its option-implied risk compensation in the crude oil market. We identify economically large premia for upside and downside tail risks that significantly forecast crude oil futures returns. These premia are also reflected in the convenience yield for physical oil, which amplifies the predictive power for spot returns. Oil tail risk premia are not spanned by aggregate uncertainty measures, suggesting that shifts in market-specific risk attitudes contribute to commodity price volatility and return predictability. © 2024 Elsevier B.V.