publication . Article . Other literature type . Preprint . 2011

Variance Risk Premiums and Predictive Power

Wang, Zhiguang; Fausti, Scott W.; Qasmi, Bashir A.; Wang, Zhiguang; Fausti, Scott W.; Qasmi, Bashir A.;
Open Access
  • Published: 15 Apr 2011 Journal: Journal of Futures Markets, volume 32, pages 587-608 (issn: 0270-7314, Copyright policy)
  • Publisher: Wiley
Abstract
We propose a fear index for corn using the variance swap rate synthesized from out-of-the-money call and put options as a measure of implied variance. Previous studies estimate implied variance based on Black (1976) model or forecast variance using the GARCH models. Our implied variance approach, based on variance swap rate, is model independent. We compute the daily 60-day variance risk premiums based on the difference between the realized variance and implied variance for the period from 1987 to 2009. We find negative and time-varying variance risk premiums in the corn market. Our results contrast with Egelkraut, Garcia, and Sherrick (2007), but are in line wi...
Subjects
free text keywords: Variance Risk Premium, Variance Swap, Model-free Variance, Implied Variance, Realized Variance, Corn VIX, Economics and Econometrics, Accounting, General Business, Management and Accounting, Finance, Economics, One-way analysis of variance, Realized variance, Price variance, Direct material price variance, Financial economics, Econometrics, Variance swap, Law of total variance, Variance decomposition of forecast errors, Variance risk premium, Risk and Uncertainty, Model-free Variance, Implied Variance, Corn VIX, jel:Q13, jel:Q14, jel:G13, jel:G14
Related Organizations
34 references, page 1 of 3

Ait-Sahalia, Y., and A. W. Lo. 1998. “Nonparametric Estimation of State-price Densities Implicit in Financial Asset Prices.” Journal of Finance, 53, 499-547. [OpenAIRE]

Anderson, R. 1985. “Some Determinants of the Volatility of Futures Prices.” Journal of Futures Markets, 5, 331-48.

Bakshi, G., Cao, C. and Z. Chen. 1997. “Empirical Performance of Alternative Option Pricing Models.” Journal of Finance, 52, 2003-2049. [OpenAIRE]

Bakshi, G. and N. Kapadia. 2003. “Delta-hedged Gains and The Negative Market Volatility Risk Premium.” Review of Financial Studies, 16, 527-566.

Bates, D. 2003. “Empirical Option Pricing: A Retrospection.” Journal of Econometrics, 116, 387-404.

Black, F. 1976. “The Pricing of Commodity Contracts.” Journal of Financial Economics, 3, 167-179

Bollerslev, T. 1986. "Generalized Autoregressive Conditional Heteroskedasticity." Journal of Econometrics, 31, 307-327. [OpenAIRE]

Britten-Jones, M. and A. Neuberger. 2000. “Option Prices, Implied Price Processes, and Stochastic Volatility.” Journal of Finance, 55, 839-866.

Bunge, J. 2010. “Fear Comes to Commodities Trade.” The Wall Street Journal, March 8, 2010.

Carr, P., and D. Madan. 1998. “Towards a Theory of Volatility Trading”, R. Jarrow, ed., Risk Book on Volatility. New York: Risk, 417-27.

Carr, P. and L. Wu. 2009. “Variance Risk Premiums.” Review of Financial Studies, 22(3), 1311-1341.

Christensen, B. J. and N. R. Prabhala. 1998. “The Relation between Implied and Realized Volatility.” Journal of Financial Economics, 50, 125-150. [OpenAIRE]

Christensen, B. J., C. S. Hansen, and N. R. Prabhala. 2001. “The Telescoping Overlap Problem in Options Data.” Working paper, University of Aarhus and University of Maryland.

Day, T. and C. Lewis. 1993. “Forecasting Futures Market Volatility.” Journal of Derivatives, 1, 33-50.

Demeterfi, K., E. Derman, M. Kamal, and J. Zou. 1999. “A Guide to Volatility and Variance Swaps.” Journal of Derivatives, 6(4), 9-32. [OpenAIRE]

34 references, page 1 of 3
Powered by OpenAIRE Open Research Graph
Any information missing or wrong?Report an Issue
publication . Article . Other literature type . Preprint . 2011

Variance Risk Premiums and Predictive Power

Wang, Zhiguang; Fausti, Scott W.; Qasmi, Bashir A.; Wang, Zhiguang; Fausti, Scott W.; Qasmi, Bashir A.;