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Variance Risk Premiums and Predictive Power of Alternative Forward Variances in the Corn Market


  • Zhiguang Wang

    () (South Dakota State University Department of Economics)

  • Scott W. Fausti

    () (South Dakota State University Department of Economics)

  • Bashir A. Qasmi

    () (South Dakota State University Department of Economics)


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.

Suggested Citation

  • Zhiguang Wang & Scott W. Fausti & Bashir A. Qasmi, 2010. "Variance Risk Premiums and Predictive Power of Alternative Forward Variances in the Corn Market," Staff Papers 100001, South Dakota State University, Department of Economics.
  • Handle: RePEc:sda:staffp:100001

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    References listed on IDEAS

    1. Rosson, C. Parr, III, 2012. "C. Parr Rosson," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(03), August.
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    Cited by:

    1. Trujillo-Barrera, Andres & Mallory, Mindy L. & Garcia, Philip, 2012. "Volatility Spillovers in U.S. Crude Oil, Ethanol, and Corn Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(2), August.
    2. repec:eee:jimfin:v:77:y:2017:i:c:p:1-17 is not listed on IDEAS
    3. Dimitrios Bakas & Athanasios Triantafyllou, 2017. "The Impact of Uncertainty Shocks on the Volatility of Commodity Prices," Working Paper series 17-31, Rimini Centre for Economic Analysis.

    More about this item


    Variance Risk Premium; Variance Swap; Model-free Variance; Implied Variance; Realized Variance; Corn VIX;

    JEL classification:

    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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