# George Prat

Eric Girardin : eric.girardin[at]univ-amu.fr

Gaël Leboeuf : gael.leboeuf[at]univ-amu.fr

Christelle Lecourt : christelle.lecourt[at]univ-amu.fr

The oil risk premium (ORP) is defined as the relative difference between the expected oil price and the oil futures price. Survey data revealing the expected values of the oil price three and twelve months ahead, we can thus directly assess the ex-ante ORP for these two horizons. Such ex-ante ORPs differ greatly from the ex-post ORPs widely considered in the literature which are built by replacing the expected price by the ex-post spot price. A simple portfolio choice model leads us to express each of the two ex-ante ORPs by the product of the price of risk and the expected variance of the oil return, these two components being both time-varying and horizon dependent. For each horizon, the unobservable risk price is represented as a stochastic variable using Kalman filtering method while the expected variance is proxied as the weighted average of past instantaneous variances. Considering monthly data covering thirty years, positive and negative values of risk prices turn out to be consistent with the predictions of the prospect theory and are shown to be correlated with a number of economic and oil market-related factors. The representative investor is found to be mostly risk seeking at the short horizon and mostly risk averse at the longer horizon. An upward sloping term structure of ex-ante ORPs is highlighted over our period which is rather well described by our modelling.