Variance Risk Premia in Commodity Markets

59 Pages Posted: 4 Jan 2013 Last revised: 7 Apr 2014

See all articles by Marcel Prokopczuk

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Chardin Wese Simen

University of Reading - ICMA Centre

Date Written: April 7, 2014

Abstract

We use a large panel of commodity option prices to study the market price of variance risk. We construct synthetic variance swaps and find significantly negative variance risk premia in nearly all commodity markets. An equally-weighted portfolio of short commodity variance swaps earns an annualized Sharpe Ratio of around 40%. We document increasing comovements across bonds, commodities and equity variance swap returns, suggesting that the variance swap markets are increasingly integrated. Finally, we show that commodity variance risk premia are distinct from price risk premia, indicating that variance risk is unspanned by commodity futures.

Keywords: commodities, variance risk premia, variance swaps

JEL Classification: G12, G13

Suggested Citation

Prokopczuk, Marcel and Wese Simen, Chardin, Variance Risk Premia in Commodity Markets (April 7, 2014). Available at SSRN: https://ssrn.com/abstract=2195691 or http://dx.doi.org/10.2139/ssrn.2195691

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chardin Wese Simen

University of Reading - ICMA Centre ( email )

Henley Business School
University of Reading
Reading, RG6 6BA
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
1,034
rank
19,482
Abstract Views
4,958
PlumX Metrics