Variance Risk Premiums and Predictive Power of Alternative Forward Variances in the Corn Market
South Dakota State University
Scott W. Fausti
South Dakota State University - Department of Economics
Bashir A. Qasmi
affiliation not provided to SSRN
June 20, 2010
Journal of Futures Markets, Forthcoming
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. We find negative and time-varying variance risk premiums (realized variance minus implied variance) in the corn market from 1987 to 2009. Our results contrast with Egelkraut, T. M., Garcia, P., & Sherrick, B. J. (2007), but are in line with the findings of Simon (2002). We conclude that our synthesized model-free implied variance estimation procedure contains superior information about future realized variance relative to traditional model-dependent estimating procedures: the implied variance model by Black (1976) and the seasonal GARCH(1, 1) forecasted variance model.
Keywords: Variance Risk Premium, Variance Swap, Model-free Variance, Implied Variance, Realized Variance, Corn VIX
JEL Classification: Q13, Q14, G13, G14Accepted Paper Series
Date posted: July 10, 2011
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