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Characterizing implied volatility functions from agricultural options markets
Author(s) -
McKenzie Andrew M.,
Thomsen Michael R.,
Adjemian Michael K.
Publication year - 2022
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/ajae.12288
Subject(s) - volatility (finance) , futures contract , economics , feeder cattle , implied volatility , skew , volatility smile , agriculture , financial economics , price discovery , econometrics , monetary economics , agricultural science , geography , environmental science , astronomy , physics , archaeology
We provide the first comprehensive characterization and comparison of implied volatility functions for five major agricultural options markets—corn, soybeans, soft red winter wheat, live cattle, and feeder cattle—using intraday tick data. Our results show that cattle markets exhibit a distinct leftward skew, which is puzzling and indicates that out‐of‐the‐money traded put options are theoretically overpriced. In contrast, we find that grain market implied volatility functions display a flatter, less pronounced smile pattern. We examine market sentiment induced short‐term hedging pressures using Commodity Futures Trading Commission reports, and market uncertainty around Cattle on Feed reports, as potential causes of the cattle markets skew. However, our results show that the explanatory power of our short‐term hedging pressure proxies are only helpful in isolated cases but overall cannot explain the large skews we observe in cattle markets.