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Essays on Volatility and Variance Risk Premium

Su, X. (2021) Essays on Volatility and Variance Risk Premium. PhD thesis, University of Reading

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To link to this item DOI: 10.48683/1926.00100341


The thesis consists of three chapters on volatility and variance risk premium. In second chapter, we analyze volatility-managed strategies in commodity futures markets. We focus on two kinds of strategy: scaling original portfolio before and after its formation by volatility information, and three kinds of portfolio: momentum, basis momentum and carry trade. We find that both two strategies do not significantly improve the performance of the original portfolio. Exploring potential reasons behind this result, we find that the accuracy of the forecasting model, the economic conditions, the choice of the evaluation criteria, as well as as the method used to construct the portfolio cannot explain our main results. In third chapter, we investigate the time-series models for volatility risk premium (V RP) forecasts and their implications for volatility forecasting. We employ the role of V RP to reduce the bias in the model-free implied volatility (MFIV) and get an efficient and unbiased forecast of volatility. We study on commodity-related ETFs and compare the time-series model for volatility forecasting, EWMA and MFIV-related forecasts. Using Mincer-Zarnowitz regresivsion and two kinds of loss function, we confirm that MFIV performs better than EWMA and MFIV is biased. Furthermore, our adjustment for MFIV outperforms than pure MFIV and MFIV adjusted by historical averages of V RP. Our findings are robust to alternative proxies of the realized volatility, different V RP format and different rolling window of forecast. In fourth chapter, we study the effects of federal fund rate announcements on the market price of variance risk. We find that there is a positive relationship between the change in the variance risk premium and the interest rate shocks and the response to FOMC surprise declines with increases of maturity. Additionally, we document that the response is mainly driven by the reactions of implied variance and variance risk premium with short maturity respond more to timing surprise. Furthermore, we show that investors matter the downside risk and need more compensation since most of the FOMC announcement effect is from the expansionary policy, negative surprise and bad variance risk premium.

Item Type:Thesis (PhD)
Thesis Supervisor:Wese Simen, C.
Thesis/Report Department:Henley Business School, ICMA Centre
Identification Number/DOI:
Divisions:Henley Business School > ICMA Centre
ID Code:100341
Date on Title Page:December 2020

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