Bad volatility is not always bad: evidence from the commodity markets. Issue 40 (26th August 2020)

• Record Type: Journal Article
• Authors: Indriawan, Ivan; Lien, Donald; Roh, Tai-Yong; Xu, Yahua
• Is Part Of: Applied economics. Volume 52:Issue 40(2020)
• Page Start: 4384
• Page End: 4402
• Publication Date: 2020-08-26
• Subjects: Commodity markets -- upside and downside variance risk premiums -- asymmetric risk -- prediction; C53 -- G11 -- G14 -- G17; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2020.1735619
• Languages: English
• ISSNs: 0003-6846

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.