Commodity Variance Risk Premia and Expected Futures Returns: Evidence from the Crude Oil Market

58 Pages Posted: 24 Jul 2013 Last revised: 13 Aug 2015

See all articles by Sang Baum Kang

Sang Baum Kang

Illinois Institute of Technology - Stuart School of Business

Xuhui (Nick) Pan

University of Oklahoma

Date Written: August 9, 2015

Abstract

We develop an extended mean-variance model to investigate the relationship between variance risk premia (VRP) and expected futures returns in the commodity market. In the presence of stochastic variance, commodity producers trade both futures and options to hedge their exposure to commodity price and volatility risk; speculators provide liquidity and ask for risk premia. This model reveals a negative relationship between VRP and expected futures returns. Empirically, we measure VRP using options and high-frequency futures data in the crude oil market. Consistent with our model, we find that VRP negatively predict futures returns even after controlling for other predictor variables.

Keywords: Mean-Variance; Variance Risk Premia; Futures Return; Predictability; Crude Oil

JEL Classification: G12, G13

Suggested Citation

Kang, Sang Baum and Pan, Xuhui (Nick), Commodity Variance Risk Premia and Expected Futures Returns: Evidence from the Crude Oil Market (August 9, 2015). Available at SSRN: https://ssrn.com/abstract=2296932 or http://dx.doi.org/10.2139/ssrn.2296932

Sang Baum Kang (Contact Author)

Illinois Institute of Technology - Stuart School of Business ( email )

565 W Adams St
Room 454
Chicago, IL
United States
312-906-6577 (Phone)

Xuhui (Nick) Pan

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
452
Abstract Views
2,167
rank
80,772
PlumX Metrics