The pricing of variance risks in agricultural futures markets: do jumps matter?

This article focuses on decomposing the variance risk premium (VRP) in agricultural futures markets, specifically corn and soybeans, into jump and diffusive volatility components using options and futures data from 2009 to 2021. The variance risk premium measures the cost market participants pay to hedge against unexpected increases in future volatility, with the study finding that this cost primarily arises from hedging jump volatility—large, sudden price changes—rather than diffusive volatility, which reflects continuous price fluctuations. The analysis reveals that the willingness to pay for protection against jump volatility is higher during the summer growing season and before United States Department of Agriculture (USDA) announcements, which introduce additional uncertainty about large price movements. These findings highlight distinct risk perceptions toward jump and diffusive volatility in agricultural markets and suggest that tailored risk management tools focusing on jump volatility could better serve market participants.