Estimating Volatility Risk Premia Across Oil, Gold, and Equity Sectors
Summary
The article explains how to estimate the volatility risk premium (VRP) by comparing option implied volatility with volatility that is later realised. Using ORATS data, it describes a practical alignment issue: implied volatility looks forward across calendar days, while the historical volatility measure uses a trailing window of trading days. It uses sector ETFs as proxies and expresses the VRP relative to implied volatility to compare sectors.
The analysis reports that VRP is generally positive but can turn negative, and that oil and gold ETFs historically showed higher relative VRP returns and narrower distributions than other sectors. The author suggests that option sellers may demand more premium for volatile assets. These findings are exploratory: the relative measure is not an actual investment return, ETF tracking and dividend effects can distort estimates, and the choices of implied and realised volatility measures affect results. The article presents the patterns as motivation for further investigation, not a demonstrated trading strategy.
Key ideas
- Implied volatility reflects option prices and is forward-looking, while realised volatility is estimated from past returns.
- Estimating VRP requires aligning the forward implied-volatility horizon with a suitable realised-volatility window.
- The article scales the difference between implied and realised volatility by implied volatility to compare sectors.
- Oil and gold ETFs showed higher relative VRP returns than the other sectors in the historical analysis.
- ETF tracking, dividends, and volatility-measure choices can affect the estimates.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.