Files
Abstract
We propose a fear index for corn using the variance swap rate synthesized from
out-of-the-money call and put options as a measure of implied variance. Previous studies
estimate implied variance based on Black (1976) model or forecast variance using the
GARCH models. Our implied variance approach, based on variance swap rate, is model
independent. We compute the daily 60-day variance risk premiums based on the
difference between the realized variance and implied variance for the period from 1987 to
2009. We find negative and time-varying variance risk premiums in the corn market. Our results contrast with Egelkraut, Garcia, and Sherrick (2007), but are in line with the
findings of Simon (2002). We conclude that our synthesized implied variance contains
superior information about future realized variance relative to the implied variance
estimates based on the Black (1976) model and the variance forecasted using the
GARCH(1,1) model.