Moment spreads in the energy market

In this paper, we first extend the variance risk premium (VRP) in Bollerslev, Tauchen and Zhou (2009) into the moment spreads, including the skewness spread (SKS) and the kurtosis spread (KTS), and then investigate the return predictability of the moment spreads in the energy market. There are three main findings. First, VRP can significantly predict energy market returns at daily and weekly frequencies. For example, the weekly in-sample and out-of-sample R² for predicting the weekly Energy Select Sector SPDR ETF (XLE) excess returns are 1.13% and 1.32%, respectively. Second, VRP can significantly predict crude oil returns (i.e., returns of both crude oil futures and crude oil ETF) at a monthly frequency with both monthly in-sample and out-of-sample R² of around 7%. Finally, the kurtosis spread (KTS) of the energy market is an important predictor for excess natural gas returns (i.e., returns of both natural gas futures and natural gas ETF) across different horizons.