Variance Risk Premia in Energy Commodities

Anders Bjerre Trolle, Eduardo S. Schwartz

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This article investigates variance risk premia in energy commodities, particularly crude oil and natural gas, using a robust model-independent approach. Over a period of 11 years, we find that the average variance risk premia are significantly negative for both energy commodities. However, it is difficult to explain the level and variation in energy variance risk premia with systematic or commodity-specific factors. The return profile of a natural gas variance swap resembles that of a call option, while the return profile of a crude oil variance swap, if anything, resembles the return profile of a put option. The annualized Sharpe ratios from shorting energy variance are sizable; although not nearly as high as the annualized Sharpe ratio of shorting S&P 500 Index variance, they are comparable to those of shorting interest rate volatility or variance on individual stocks.
Original languageEnglish
JournalJournal of Derivatives
Volume17
Issue number3
Pages (from-to)15-32
Number of pages18
ISSN1074-1240
DOIs
Publication statusPublished - 2010
Externally publishedYes

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