There is a lot of research on Variance Risk Premium in equity options, but not a lot about commodities. Which is why I wanted to share an interesting research paper on SSRN - Variance Risk Premia in Commodity Markets, which provides thorough analysis of 21 commodities in 6 categories:
Energy: Crude Oil, Heating Oil, Natural Gas
Grains: Corn, Cotton, Soybeans, Soybean Meal, Soybean Oil, Sugar, Wheat
Livestock: Lean Hogs, Live Cattle
Metals: Copper, Gold, Silver
Tropical: Cocoa, Colombian Coffee, Oats, Orange Juice, Rough Rice
Wood: Lumber
They present statistical findings, as well as forecasting model for VRP based on basis and open interest. I have blogged about VRP of VIX options here. Another excellent overview of the topic is Jared Woodard's ebook Options and the Volatility Risk Premium.
Energy: Crude Oil, Heating Oil, Natural Gas
Grains: Corn, Cotton, Soybeans, Soybean Meal, Soybean Oil, Sugar, Wheat
Livestock: Lean Hogs, Live Cattle
Metals: Copper, Gold, Silver
Tropical: Cocoa, Colombian Coffee, Oats, Orange Juice, Rough Rice
Wood: Lumber
They present statistical findings, as well as forecasting model for VRP based on basis and open interest. I have blogged about VRP of VIX options here. Another excellent overview of the topic is Jared Woodard's ebook Options and the Volatility Risk Premium.
I read somewhere that the term "volatility risk premium" should be beter replaced by "correlation risk premium", because such a premium only exists in index options and not in equity options.
ReplyDeleteThe correlation of stocks on downward movements explains the reason for such a premium.
Any comments on that?
Well - commodities don't have correlation and have var risk premium. I don't think it would be correct to exclude var over correlation: index options just happen to have 2 components - var and correlation. But of course all these things are abstract - other people may describe them as liquidity protection, or margin hedging, etc...
ReplyDeleteSinclair wrote an article about the variance premium in a magazine:
ReplyDeletehttp://www.activetradermag.com/index.php/c/Trading_Strategies/d/The_variance_premium