The pricing of variance risks in agricultural futures markets: do jumps matter?

Xinyue He, Siyu Bian, Teresa Serra

Research output: Contribution to journalArticlepeer-review

Abstract

The existence of a negative variance risk premium on agricultural futures contracts suggests that market participants pay to hedge unexpected increases in the volatility of these contracts. In this paper, we decompose the variance risk premium in corn and soybeans markets into jump and diffusive components using options and futures data from 2009 to 2021. We find that market participants on average only pay to hedge unexpected increases in jump volatility but not those in diffusive volatility. Furthermore, growing season uncertainty and the arrival of United States Department of Agriculture (USDA) announcements play important roles in driving the market’s fear of unexpectedly large price jumps.

Original languageEnglish (US)
Pages (from-to)1428-1452
Number of pages25
JournalEuropean Review of Agricultural Economics
Volume50
Issue number4
DOIs
StatePublished - Sep 1 2023

Keywords

  • agricultural commodity markets
  • futures
  • options
  • variance risk premium

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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