The Announcement Volatility Risk Premium in Agricultural Markets: Evidence From USDA Report Releases

The release of major reports by the U.S. Department of Agriculture (USDA) has been documented to induce significant price volatility in agricultural futures markets, yet its implication on the pricing of agricultural options is much less understood. This study develops an announcement jump model to disentangle the option‐implied volatility specifically associated with monthly World Agricultural Supply and Demand Estimates (WASDE) report releases. Using data for corn, soybeans and wheat, we find evidence that these options are overpriced primarily with respect to the realised volatility observed on announcement days rather than on normal trading days, suggesting the existence of an announcement volatility risk premium. A long straddle position, formed by the simultaneous purchase of a call and a put option and providing protection against large price movements in either direction, generates a significant loss of 3%–7% only on report release days. Furthermore, we show that this negative return is unlikely driven by exposure to other risks and is more pronounced when the experts' forecast dispersion is high, indicating that market participants pay to hedge extreme volatility induced by announcements in agricultural markets.