Variance risk premiums of commodity ETFs
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 Fund...
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| Main Authors: | , |
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2017
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/lkcsb_research/5020 https://ink.library.smu.edu.sg/context/lkcsb_research/article/6019/viewcontent/Variance_Risk_Premiums_of_Commodity_ETFs_pp.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | 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. |
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