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Futures risk premia in the era of shale oil

Ferriani, Fabrizio and Natoli, Filippo and Veronese, Giovanni and Zeni, Federica (2018): Futures risk premia in the era of shale oil.

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The advent of shale oil in the United States triggered a structural transformation in the oil market. We show, both theoretically and empirically, that this process has relevant consequences on oil risk premia. We construct a consumption-based model with shale producers interacting with financial speculators in the futures market. Compared to conventionals, shale producers have a more flexible technology, but higher risk aversion and additional costs due to their reliance on external finance. Our model helps to explain the observed pattern of aggregate hedging by US firms in the last decade. The empirical analysis shows that the hedging pressure of shale producers has become more relevant than that of conventional producers in explaining the oil futures risk premium.

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