Bad volatility is not always bad: evidence from the commodity markets |
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Authors: | Ivan Indriawan Donald Lien Tai-Yong Roh |
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Institution: | 1. Department of Finance, Auckland University of Technology , Auckland, New Zealand;2. College of Business, University of Texas – San Antonio , San Antonio, TX, USA https://orcid.org/0000-0002-0659-2831;3. Advanced Institute of Finance and Economics, Liaoning University , Shenyang, China |
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Abstract: | ABSTRACT Using exchange-traded fund (ETF) options data, we examine the predictive power of variance risk premium on returns of four commodities: crude oil, natural gas, gold and silver. We also analyze the predictive power of upside and downside variance risk premiums using a decomposition model conditional on the direction of the underlying market movement. We find that both the undecomposed and decomposed variance risk premiums are able to predict commodity prices. The decomposed variance risk premiums, however, outperform the undecomposed premium. The importance of upside and downside variance risk premiums differs across markets, related to hedging demand. In energy markets, both upside and downside premiums have strong predictive power, while in precious metal markets, only the upside premium is predictive. |
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Keywords: | Commodity markets upside and downside variance risk premiums asymmetric risk prediction |
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