The Volatility Risk Premium (VRP) is a term used to describes the phenomenon that implied volatility tends to be higher than realized volatility for financial instruments. VRP exists due to insurance-like market for financial derivatives and market makers having limited risk capacity.
We start by discussing the VRP in equity markets. An equity index VRP strategy has positive and persistent returns but suffers sharp drawdowns. In comparison, individual commodity VRPs have similar returns and risks as equity index VRP. Furthermore, individual commodity VRPs provide excellent diversification for one another, such that a diversified portfolio of commodity VRPs decrease volatility of returns and increases the Sharpe ratio compared to individual commodity VRPs.