The Return‐Implied Volatility Relation for Commodity ETFs

Abstract

We examine the return‐implied volatility relation by employing “commodity” option VIXs for the euro, gold, and oil. This relation is substantially weaker than for stock indexes. We propose several potential reasons for these unusually weak results. Also, gold possesses an unusual positive contemporaneous return coefficient, which is consistent with a demand volatility skew rather than the typical investment skew. Moreover, the euro and gold are not asymmetric. We relate the results to trading strategies, algorithmic trading, and behavioral theories. An important conclusion of the study is that important differences exist regarding implied volatility for certain types of assets that have not yet been explained in the literature; namely, the results in this study concerning commodity ETFs versus stock indexes, plus previous research on stock indexes versus individual stocks, and the pricing of stock index options versus individual stock options. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:261–281, 2014