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The Journal of Derivatives

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Article

Variance Risk Premia in Energy Commodities

Anders B Trolle and Eduardo S Schwartz
The Journal of Derivatives Spring 2010, 17 (3) 15-32; DOI: https://doi.org/10.3905/jod.2010.17.3.015
Anders B Trolle
is Swiss Finance Institute assistant professor at the Ecole Polytechnique Fédérale de Lausanne in Lausanne, Switzerland.
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  • For correspondence: anders.trolle@epfl.ch
Eduardo S Schwartz
is the California Chair in Real Estate and Land Economics at the UCLA Anderson School of Management in Los Angeles, CA.
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  • For correspondence: eduardo.schwartz@anderson.ucla.edu
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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.

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The Journal of Derivatives: 17 (3)
The Journal of Derivatives
Vol. 17, Issue 3
Spring 2010
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Variance Risk Premia in Energy Commodities
Anders B Trolle, Eduardo S Schwartz
The Journal of Derivatives Feb 2010, 17 (3) 15-32; DOI: 10.3905/jod.2010.17.3.015

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Variance Risk Premia in Energy Commodities
Anders B Trolle, Eduardo S Schwartz
The Journal of Derivatives Feb 2010, 17 (3) 15-32; DOI: 10.3905/jod.2010.17.3.015
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