Abstract
Trolle(2008) defines the market risk into two kinds – one kind of risk can be totally hedged by futures and the other one cannot be totally hedged by futures but partly by options. And then we interpret those two kinds of risks in the mathematical way – the risk which can be totally hedged by futures is defined as Spanned Stochastic Volatility; the risk which cannot be totally hedged by futures but partly hedged by options is defined as Unspanned Stochastic Volatility. To test the existence of Unspanned Stochastic Volatility, we follow Trolle (2008)’s research frame to do the empirical analysis on COMEX Gold, NYMEX Oil, SHFE Copper market. As China not introduce commodity futures options, Therefore, we use two volatility proxies for SHFE copper market, which is different from Trolle(2009). The result is that the Unspanned Stochastic Volatility exists in the above three market, which provide the theoretical support to the introducing of commodity options in China.
