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Anders Bjerre Trolle
Title: Variance risk premia in energy commodities
Abstract
This abstract is based on a working paper with Eduardo Schwartz. Anders Bjerre Trolle and Eduardo Schwartz are currently in process of updating the abstract, so this is an older version.
"This paper 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 negative for both energy commodities. Energy variance risk premia in dollar terms are time-varying, while energy variance risk premia in return terms, particularly in the case of natural gas, are more constant over time. Finally, 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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