Variance and jump risk premia in energy and stock markets: evidence from high frequency data & Introduction to the EU funded XPRESS project
Abstract 1: It is well documented that investors price not only the uncertainty about returns on their asset holdings but also the uncertainty about the return variance itself. The former uncertainty is well investigated but the latter needs further investigation in order to establish its quantitative size and to understand its impacts on returns, hedging and market conditions. This paper, therefore, contributes to the estimation of the jump and variance risk premia in crude oil and natural gas futures markets. We use the 10-minute aggregations of high frequency data on natural gas and crude oil futures to estimate the Heston Stochastic Volatility model with leverage effects and jumps building the Realised Variance series as the sum of the high frequency intraday squared returns. We then examine the informational content of high-frequency data using a Generalized Method of Moments (GMM) approach. By using the extra information provided by 3 month VIX implied volatility which is employed as a proxy for the point in time volatility, we find statistical evidence of jump and variance risk premia in both the natural gas and WTI crude oil futures markets.