Variance Risk Premia in Commodity Markets*

  • Marcel Prokopczuk, Wese Simen
  • Published 2013

Abstract

In this paper, we study variance risk premia in commodity markets. Using synthetic variance swaps, we find significant variance risk premia in 18 out of 21 markets. Typically, variance risk premia are negative, time-varying and their magnitudes increase with variance. Consistent with theory, we find a significant relation between variance risk premia and macroeconomic factors. Furthermore, we evaluate the information content of commodity variance risk premia for future returns. We show that gold’s variance risk premium has predictive power for returns in most of the markets considered. This economically significant predictive power is robust to the inclusion of traditional predictors. JEL classification: G12, G13 Keywords: Commodities, Variance risk premia, Variance swaps *Marcel Prokopczuk gratefully acknowledges financial support from the British Academy. We thank Lazaros Symeonidis for helpful comments. Contact: marcel.prokopczuk@zu.de (M. Prokopczuk) and c.wesesimen@icmacentre.ac.uk (C. Wese Simen). „Chair of Empirical Finance and Econometrics, Zeppelin University, 88045 Friedrichshafen, Germany. …ICMA Centre, Henley Business School, University of Reading, Reading, RG6 6BA, United Kingdom.

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Cite this paper

@inproceedings{Prokopczuk2013VarianceRP, title={Variance Risk Premia in Commodity Markets*}, author={Marcel Prokopczuk and Wese Simen}, year={2013} }