Variance Risk in Commodity Markets

Prokopczuk, M, Symeonidis, Lazaros and Simen, Chardin Wese (2017) Variance Risk in Commodity Markets. Journal of Banking and Finance, 81 (C). pp. 136-149.

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Abstract

We analyze the variance risk of commodity markets. We construct synthetic variance swaps and find significantly negative realized variance swap payoffs in most markets. We find evidence of commonalities among the realized payoffs of commodity variance swaps. We also document comovements between the realized payoffs of commodity, equity and bond variance swaps. Similar results hold for expected variance swap payoffs. Furthermore, we show that both realized and expected commodity variance swap payoffs are distinct from the realized and expected commodity futures returns, indicating that variance risk is unspanned by commodity futures.

Item Type:	Article
Additional Information:	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. ## TULIP Type: Articles/Papers (Journal) ##
Uncontrolled Keywords:	Commodities, Variance risk premia, Variance swaps
Depositing User:	Symplectic Admin
Date Deposited:	22 Aug 2019 10:13
Last Modified:	19 Jan 2023 00:28
DOI:	10.1016/j.jbankfin.2017.05.003
Related URLs:	Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3052240