What Insights Do Short-Maturity (7DTE) Return Predictive Regressions Offer about Risk Preferences in the Oil Market?

What Insights Do Short-Maturity (7DTE) Return Predictive Regressions Offer about Risk Preferences in the Oil Market?

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In this study, we investigate the ability of three higher-order risk-neutral return cumulants to predict short maturity (weekly) dragon ball lg disney returns of oil futures.Our data includes weekly West Texas Crude Oil futures options that expire in 7 days (7DTE).Using a model-free approach, we estimate these risk-neutral return cumulants at the beginning of each options expiration cycle.

Our results suggest that the third risk-neutral return cumulant consistently predicts the returns of various oil futures (including WTI, Brent, Dubai, Heating Oil, and RBOB Gasoline).We compare our findings with 14 other predictors and offer a theoretical explanation for the negative coefficient observed for the 7DTE third risk-neutral return cumulant.Our theory connects higher-order hyfrodol risk-neutral return cumulants with the risk premiums of oil futures.

Furthermore, our quantitative investment strategy favors the predictability of oil futures returns.