Variance Risk Premia in Commodity Markets
59 Pages Posted: 4 Jan 2013 Last revised: 7 Apr 2014
Date Written: April 7, 2014
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: Suggested Citation