Variance risk premiums of commodity ETFs

• Main Authors: TEE, Chyng Wen, TING, Christopher H. A.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: Finance and Financial Management
• 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
• Institution: Singapore Management University

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.