Variance risk in commodity markets |
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Institution: | 1. Leibniz University Hannover, Koenigsworther Platz 1, D-30167 Hannover, Germany;2. ICMA Centre, Henley Business School, University of Reading, RG6 6BA, UK;3. Norwich Business School, University of East Anglia, Norwich NR4 7TJ, United Kingdom |
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Abstract: | We analyze the variance risk of commodity markets. We construct synthetic variance swaps and find significantly negative realized variance swap payoffs in most markets. We find evidence of commonalities among the realized payoffs of commodity variance swaps. We also document comovements between the realized payoffs of commodity, equity and bond variance swaps. Similar results hold for expected variance swap payoffs. Furthermore, we show that both realized and expected commodity variance swap payoffs are distinct from the realized and expected commodity futures returns, indicating that variance risk is unspanned by commodity futures. |
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