Risk premiums on inventory assets: The case of crude oil and natural gas

This study tested for the presence of risk premiums on crude oil and natural gas, The econometric analysis followed from a stochastic model in which the equilibrium value of inventories depends on a convenience yield and an option value related to price uncertainty. The empirical findings provide rather strong support for the presence of risk premiums and also evidence for the existence of convenience yields, The risk premiums rose sharply with greater price volatility and help to explain why prices for immediate sales often exceed prices for future delivery. (C) 2001 John Wiley & Sons, Inc.