Variance Risk Premiums and Predictive Power of Alternative Forward Variances in the Corn Market

We propose a fear index for corn using the variance swap rate synthesized from out-of-the-money call and put options as a measure of implied variance. We find negative and time-varying variance risk premiums (realized variance minus implied variance) in the corn market from 1987 to 2009. Our results contrast with Egelkraut, T. M., Garcia, P., & Sherrick, B. J. (2007), but are in line with the findings of Simon (2002). We conclude that our synthesized model-free implied variance estimation procedure contains superior information about future realized variance relative to traditional model-dependent estimating procedures: the implied variance model by Black (1976) and the seasonal GARCH(1, 1) forecasted variance model