Titlebook: Virtual Barrels; Quantitative Trading Ilia Bouchouev Book 2023 The Editor(s) (if applicable) and The Author(s), under exclusive license to

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Virtual Barrels978-3-031-36151-7Series ISSN 2192-4333 Series E-ISSN 2192-4341

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Financialization and the Theory of Hedging Pressurehe oil market, the phenomenon dubbed financialization. We track the market transition from the early days of normal backwardation to the subsequent regime of normal contango and combine them into a more general economic framework that describes the hedging pressure equilibrium.

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Systematic Risk Premia Strategies markets through the lenses of risk premia, such as momentum, carry, and value. We discuss how the source of these risk premia in the oil market is ultimately linked to the theory of storage. Important concepts of signal blending and the reaction function are introduced.

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Macro Tradingee cross-asset relative value strategies. We conclude by constructing a simple and somewhat naïve fair value model for the price of oil. While this model is built on questionable theoretical grounds, it is a good example of when something that should not work in theory turns out to be helpful in practice.

AMOR

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Volatility Smile Tradingand use a more flexible framework of diffusion processes. We apply the technique of perturbation methods to develop a novel quadratic normal model. This model corrects the Bachelier formula for skewness and kurtosis with the three model parameters mapped to the three primary option benchmarks in the oil market.