Title

Variance Risk Premiums of Commodity ETFs

Publication Type

Journal Article

Publication Date

8-2016

Abstract

We propose a model-independent method to account for the early exercise premiums in American options on non-dividend paying stocks. We find that our estimates of early exercise premium are generally larger than the estimates by existing methods. Given the American options on the Exchange-Traded Funds (ETFs) of gold, silver, natural gas, and crude oil, we find strong empirical evidence of variance risk premiums for these commodities, over a volatility term structure up to 18 months. Furthermore, we show that volatility indexes constructed by using existing methods tend to overestimate the risk-neutral variance, and consequently the magnitude of variance risk premium. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark

Discipline

Finance and Financial Management

Research Areas

Finance; Quantitative Finance

Publication

Journal of Futures Markets

ISSN

0270-7314

Identifier

10.1002/fut.21802

Publisher

Wiley: 24 months

Additional URL

http://dx.doi.org/10.1002/fut.21802

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