Bad Volatility is Not Always Bad: Evidence from Commodity Markets

46 Pages Posted: 2 Jul 2018

See all articles by Yahua Xu

Yahua Xu

Central South University

Tai-Yong Roh

Liaoning University

Date Written: June 19, 2018

Abstract

Using four commodity exchange-traded fund (ETF) options data sets, we systematically examine the return predictability of the variance risk premiums in commodity markets. We also analyze the predictability of upside and downside variance risk premiums by performing a conditional decomposition based on the direction in which the market moves. We find that both the total and decomposed variance risk premiums contain predicative information about commodity prices, and the decomposed variance risk premiums jointly outperform the uncomposed premium. The importance of the downside (upside) variance risk premium differs across markets; in energy commodity markets, both upside and downside variance risk premiums have significant predictive power; in precious metal commodity markets, only the upside variance risk premium is predicative.

Keywords: Commodity markets; Upside and downside variance risk premiums; Asymmetric risk; Prediction

JEL Classification: G1; C5; Q3; Q4

Suggested Citation

Xu, Yahua and Roh, Tai-Yong, Bad Volatility is Not Always Bad: Evidence from Commodity Markets (June 19, 2018). Available at SSRN: https://ssrn.com/abstract=3198475 or http://dx.doi.org/10.2139/ssrn.3198475

Yahua Xu (Contact Author)

Central South University

932 Lushan South Road
Changsha, Hunan Province 410083
China
86 13135960806 (Phone)

Tai-Yong Roh

Liaoning University ( email )

Shenyang, Liaoning
China

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