Measuring and Explaining Skewness in Pricing Distributions Implied from Livestock Options

Michael Thomsen and Andrew McKenzie

No 285330, 2010 Conference, April 19-20, 2010, St. Louis, Missouri from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: We characterize volatility skews implied by options on futures for hogs and cattle. Both markets have shown a persistent leftward skew. The skew is much more pronounced in live cattle. As a practical matter, the volatility skew is evidence that the cost of using options to insure against large price declines has been considerably more expensive than the cost of using options to insure against similarly large price increases. Out-of-the-money put options are expensive in livestock markets and this is especially the case for out-of-the-money put options on cattle futures. We also examine the relationship between the volatility skew and the ex ante physical returns distribution. We do this by measuring volatility skews just before releases of USDA reports and determine whether they can be empirically linked to the direction of the large price changes that often result. Some responses in live/lean hog futures prices could be explained by characteristics of the pre-report volatility skew. However, there was little evidence linking the volatility skew to post-report responses in live cattle futures.

Keywords: Marketing (search for similar items in EconPapers)
Date: 2010-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nccc10:285330

DOI: 10.22004/ag.econ.285330

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