An earlier version was presented at the 2010 Western Economic Association International annual meeting in Portland, Oregon. We thank the editor (Bob Webb) and the referee for their extensive suggestions that greatly improve the study. We acknowledge the financial support from Agricultural Experiment Station at South Dakota State University (Project H363-10).
Variance risk premiums and predictive power of alternative forward variances in the corn market
Article first published online: 15 APR 2011
© 2011 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 32, Issue 6, pages 587–608, June 2012
How to Cite
Wang, Z., Fausti, S. W. and Qasmi, B. A. (2012), Variance risk premiums and predictive power of alternative forward variances in the corn market. J. Fut. Mark., 32: 587–608. doi: 10.1002/fut.20527
- Issue published online: 23 APR 2012
- Article first published online: 15 APR 2011
- Manuscript Accepted: MAR 2011
- Manuscript Received: JUN 2010
- Agricultural Experiment Station at South Dakota State University. Grant Number: H363-10
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