ASSESSING FOR TIME VARIATION IN OIL RISK PREMIA: AN ADCC-GARCH-CAPM INVESTIGATION
AbstractThis paper focuses on oil market dynamics through the investigation of oil systematic risk and oil risk premium dynamics over the period 1997-2012, which includes several different economic episodes, enabling us to capture a considerable number of statistical properties for oil prices. Interestingly, unlike previous studies, the authors retained data for several developed and emerging oil markets and used different oil prices in order to provide a comprehensive and wide-ranging vision of oil price dynamics. To this end and in order to take eventual time variation and asymmetry in oil price dynamics into account, the authors applied recent econometrics tests associated with the ADCC-GARCH class of model. This modelling enabled us to appropriately specify the dynamics of oil conditional variance and time-varying oil risk premium. Accordingly, this study offers three interesting findings. First, the hypotheses of asymmetry and time variation in oil risk premia are not rejected. Second, the recent global financial crisis has increased systematic oil risk and oil risk premia in different regions. Finally, oil risk premia in emerging countries are significantly higher than those in developed countries, suggesting the inclusion of additional premium induced by political instability and geopolitical changes in emerging economies.
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