Premium
Variance Risk Premiums of Commodity ETFs
Author(s) -
Tee Chyng Wen,
Ting Christopher
Publication year - 2017
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.21802
Subject(s) - volatility (finance) , variance risk premium , econometrics , variance (accounting) , economics , risk premium , dividend , variance swap , volatility risk premium , realized variance , financial economics , commodity , stochastic volatility , finance , accounting
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 37:452–472, 2017