This paper introduces the ex-ante estimation of the variance risk premium. The novel methodology proposed is applied to forecast variance risk premium in energy markets, capturing the future degree of aversion of investors towards energy variance risks. We analyze the ex-ante variance risk premium of two energy indices, XLE and USO, during the period that spans from 2011 to 2022, and compare them to that of the SPX, the benchmark for the equity market. In the computation of the ex-ante variance risk premium, simple GARCH and Markov-switching GARCH models are exploited to forecast the realized variance, while variance swap rates are retrieved from the volatility indices VXXLE, OVX, and VIX of the three market indices. We find that the ex-ante variance risk premium succeeds to forecast the imminent periods of financial distress empirically detected in the abrupt surges and plunges of the ex-post variance risk premium. In particular, USO shows higher magnitudes of the variance risk premium than XLE and SPX, predicting that investors require on average higher premiums to bear oil variance risks.

Variance Risk Premium in Energy Markets: Ex-Ante and Ex-Post Perspectives / Morelli, Giacomo. - In: THE ENERGY JOURNAL. - ISSN 0195-6574. - (2022), pp. 5-34.

Variance Risk Premium in Energy Markets: Ex-Ante and Ex-Post Perspectives

Giacomo Morelli
2022

Abstract

This paper introduces the ex-ante estimation of the variance risk premium. The novel methodology proposed is applied to forecast variance risk premium in energy markets, capturing the future degree of aversion of investors towards energy variance risks. We analyze the ex-ante variance risk premium of two energy indices, XLE and USO, during the period that spans from 2011 to 2022, and compare them to that of the SPX, the benchmark for the equity market. In the computation of the ex-ante variance risk premium, simple GARCH and Markov-switching GARCH models are exploited to forecast the realized variance, while variance swap rates are retrieved from the volatility indices VXXLE, OVX, and VIX of the three market indices. We find that the ex-ante variance risk premium succeeds to forecast the imminent periods of financial distress empirically detected in the abrupt surges and plunges of the ex-post variance risk premium. In particular, USO shows higher magnitudes of the variance risk premium than XLE and SPX, predicting that investors require on average higher premiums to bear oil variance risks.
2022
energy markets; markov switching garch; variance risk premium; variance swaps
01 Pubblicazione su rivista::01a Articolo in rivista
Variance Risk Premium in Energy Markets: Ex-Ante and Ex-Post Perspectives / Morelli, Giacomo. - In: THE ENERGY JOURNAL. - ISSN 0195-6574. - (2022), pp. 5-34.
File allegati a questo prodotto
File Dimensione Formato  
Morelli_ Variance-risk-premium_2022.pdf

embargo fino al 21/06/2025

Tipologia: Versione editoriale (versione pubblicata con il layout dell'editore)
Licenza: Tutti i diritti riservati (All rights reserved)
Dimensione 8.55 MB
Formato Adobe PDF
8.55 MB Adobe PDF   Contatta l'autore

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/1655121
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 0
  • ???jsp.display-item.citation.isi??? 0
social impact