RT Journal Article
SR Electronic
T1 Variance Risk Premia in Energy Commodities
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 15
OP 32
DO 10.3905/jod.2010.17.3.015
VO 17
IS 3
A1 Anders B Trolle
A1 Eduardo S Schwartz
YR 2010
UL https://pm-research.com/content/17/3/15.abstract
AB This article investigates variance risk premia in energy commodities, particularly crude oil and natural gas, using a robust model-independent approach. Over a period of 11 years, we find that the average variance risk premia are significantly negative for both energy commodities. However, it is difficult to explain the level and variation in energy variance risk premia with systematic or commodity-specific factors. The return profile of a natural gas variance swap resembles that of a call option, while the return profile of a crude oil variance swap, if anything, resembles the return profile of a put option. The annualized Sharpe ratios from shorting energy variance are sizable; although not nearly as high as the annualized Sharpe ratio of shorting S&P 500 Index variance, they are comparable to those of shorting interest rate volatility or variance on individual stocks.TOPICS: Interest-rate and currency swaps, other real assets, VAR and use of alternative risk measures of trading risk