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Variance risk premiums and predictive power of alternative forward variances in the corn market
Author(s) -
Wang Zhiguang,
Fausti Scott W.,
Qasmi Bashir A.
Publication year - 2012
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20527
Subject(s) - variance risk premium , variance (accounting) , variance swap , econometrics , realized variance , price variance , economics , variance decomposition of forecast errors , statistics , mathematics , volatility (finance) , implied volatility , forward volatility , volatility risk premium , accounting
Abstract We propose a fear index for corn using the variance swap rate synthesized from out‐of‐the‐money call and put options as a measure of implied variance. We find negative and time‐varying variance risk premiums (realized variance minus implied variance) in the corn market from 1987 to 2009. Our results contrast with Egelkraut, Garcia, and Sherrick (2007), but are in line with the findings of Simon (2002). We conclude that our synthesized model‐free implied variance estimation procedure contains superior information about future realized variance relative to traditional model‐dependent estimating procedures: the implied variance model by Black (1976) and the seasonal GARCH(1, 1) forecasted variance model. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:587–608, 2012