stock returns implied volatility innovations and the asymmetric volatility phenomenon we study the dynamic relation between daily stock retums and daily innovations in optionderived implied volatilities by simultaneously analyzing innovations in index and firmlevel implied volatilities we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon our results indicate that the relation between stock retums and innovations in systematic volatility idiosyncratic volatility is substantially negative near zero these results suggest that asymmetric volatility is primarily attributed to systematic market wide factors rather than aggregated firm level effects we also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stocic volatility

returns and option activity over the option expiration week for s p 100 stocks abstract for s p 100 stocks we find that the weekly returns over option expiration oe weeks a month s third friday week tend to be high relative to 1 the third friday weekly returns of other stocks with less option activity 2 the own stock s other weekly returns 3 the risk based on asset pricing alphas for these same stocks a month s fourth friday weekly returns underperform modestly we suggest the following two avenues are likely partial contributors towards understanding these return patterns 1 delta hedge rebalancing by option market makers with a reduction in short stock hedge positions over the oe week and 2 declining risk perceptions over the oe week as measured by option derived implied volatilities our findings suggest option activity can induce reliable patterns in the weekly returns of option active large cap stocks

do call prices and the underlying stock always move in the same direction this article empirically analyzes some properties shared by all one dimensional diffusion option models using sp options are not redundant securities nor ideal hedging instruments puts and the underlying asset prices may go down together much of the extant knowledge about option pricing is based on the assumption that the underlying asset price follows a one dimensional diffusion process examples of such option pricing models include the classic black scholes 1973 merton 1973 the cox ross 1976 constant elasticity of variance the ones studied in derman and kani 1994 rubinstein 1994 bergman grundy and wiener 1996 bakshi cao and chen 1997 2000 and dumas fleming and whaley 1998 all models in the one dimensional diffusion class share three basic properties first call prices are monotonically increasing and put prices are monotonically decreasing in the underlying asset price the monotonicity property second as the underlying asset price is the sole source of uncertainty for all of its options option prices must be perfectly correlated with each other and with the underlying asset the perfect

option markets and implied volatility past versus present abstract traders in the nineteenth century appear to have priced options the same way that twenty first century traders price options empirical regularities relating implied volatility to realized volatility stock prices and other implied volatilities including the volatility skew are qualitatively the same in both eras modern pricing models and centralized exchanges have not fundamentally altered pricing behavior but they have generated increased trading volume and a much closer conformity in the level of observed and model prices the major change in pricing is the sharp decline in implied volatility relative to realized volatility evident immediately upon the opening of the cboe

a behavioral explanation for the negative asymmetric return volatility relation abstract we examine the short term dynamic relation between the s p 500 nasdaq 100 index return and changes in implied volatility at both the daily and intraday level neither the leverage hypothesis nor the volatility feedback hypothesis adequately explains the results alternatively we propose that the behavior of traders from the representativeness affect and extrapolation bias concepts of behavioral finance is consistent with our empirical results of a strong daily and intraday negative return implied volatility relation moreover both the presence and magnitude of the negative relation and the asymmetry between return and implied volatility are most closely associated with extreme changes in the index returns we also show that the strength of the relation is consistent with the implied volatility skew

the determinants of asymmetric volatility volatility in equity markets is asymmetric contemporaneous return and conditional return volatility are negatively correlated in this article i develop an asymmetric volatility model where dividend growth and dividend volatility are the two state variables of the economy the model allows both the leverage effect and the volatility feedback effect the two popular explanations of asymmetry the model is estimated by the simulated method of moments i find that both the leverage effect and volatility feedback are important determinants of asymmetric volatility and volatility feedback is significant both statistically and economically the relationship between stock price and its volatility has long interested financial researchers empirically returns and conditional variance of next period s returns are negatively correlated that is negative positive returns are generally associated with upward downward revisions of the conditional volatility this empirical phenomenon is often referred to as asymmetric volatility in the literature see engle and ng 1993 zakoian 1994 and wu and xiao 1999 the presence of asymmetric volatility is most apparent during stock market crashes when a large decline in stock price is associated with a significant increase in market volatility formal econometric models have been developed by researchers to capture asymmetric volatility for example asymmetric arch models of nelson 1991 and glosten jagannathan and runkle 1993 have been found to significantly outperform their counterparts that do not accommodate the asymmetry moreover continuous time stochastic volatility models generally produce estimates of a negative correlation between return and return volatility bakshi cao and chen 1997 and bates 1997 for a review of the literature on asymmetric volatility see bekaert

how do exchange rates co move a study on the currencies of five inflation targeting countries abstract this paper does three things first it explores the type of asymmetry in exchange rate correlation for five inflation targeting countries we show their currencies co move more closely with the currencies of some influential foreign countries during joint appreciations than joint depreciations against a world currency second it establishes empirically the linkage between interest rate differentials and exchange rate correlation we find evidence that both widening and narrowing interest rate differentials will reduce the correlation third it proposes a new version of the asymmetric dynamic conditional correlation model the model proves to be capable of providing great insight into the two issues investigated

computing the market price of volatility risk in the energy commodity markets abstract in this paper we demonstrate the need for a negative market price of volatility risk to recover the difference between black scholes black f scholes m 1973 the pricing of options and corporate liabilities journal of political economy 81 637 654 black black f 1976 studies of stock price volatility changes in proceedings of the 1976 meetings of the business and economics statistics section american statistical association pp 177 181 implied volatility and realized term volatility initially using quasi monte carlo simulation we demonstrate numerically that a negative market price of volatility risk is the key risk premium in explaining the disparity between risk neutral and statistical volatility in both equity and commodity energy markets this is robust to multiple specifications that also incorporate jumps next using futures and options data from natural gas heating oil and crude oil contracts over a 10 year period we estimate the volatility risk premium and demonstrate that the premium is negative and significant for all three commodities additionally there appear distinct seasonality patterns for natural gas and heating oil where winter withdrawal months have higher volatility risk premiums computing such a negative market price of volatility risk highlights the importance of volatility risk in understanding priced volatility in these financial markets

determinants of the crude oil futures curve inventory consumption and volatility abstract since 2008 the wti oil futures curve has been positively sloped for extended periods we test whether changes in inventory alone can explain this atypically long contango to do this we estimate monthly vars of the cme wti oil futures spread and oecd and u s inventory in line with standard theory and add petroleum consumption and implied volatility to the vector of endogenous variables when we model the futures spread as one continuous series results confirm two way causation between inventory and the futures curve as predicted by the theory of storage however when we separate negative and positive futures spreads we find that two way causation between the futures spread and u s inventory breaks down shocks to oecd petroleum consumption cause more negative spreads and shocks to u s consumption cause more positive spreads in addition to inventory driven changes and increases in volatility directly raise positive spreads these new causal channels have become significant since 2008 and can be related to higher inventory inelastic supply of oil and uncertainty about global economic conditions

evaluating the cost of government credit support the oecd context governments throughout the oecd allocate a large share of societies capital and risk through their credit related activities hence accurate cost estimates for credit support programmes are a prerequisite for efficient resource allocation transparency effective management and public oversight i find that oecd governments generally take their cost of capital to be their own borrowing rate rather than using a weighted average cost of capital that includes the cost of risk borne by taxpayers and the general public in their role as equity holders that practice which is institutionalised in government accounting and budgetary rules results in cost estimates for credit support that are significantly downwardly biased relative to a fair value metric that recognises the full cost of risk the size and possible real consequences of those distortions are illustrated with analyses of the european bank for reconstruction and development the european stability mechanism and the tennessee valley authority deborah lucas

is all public capital created equal this paper uses a var approach to investigate the effects of public investment on private sector performance in the united states this approach is consistent with the argument that the analysis of

the relation between implied and realized volatility abstract previous research finds the volatility implied by s p 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility in contrast we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications our results differ from previous studies because we use longer time series and nonoverlapping data a regime shift around the october 1987 crash explains why implied volatility is more biased in previous work

u s stock returns and oil prices the tale from daily data and the 2008 2009 financial crisis abstract using daily data from january 1999 to december 2011 we examine u s stock returns s p 500 dow jones nasdaq and russell 2000 based on a wide range of information including equity vix volatility inflation expectations interest rates gold prices and the usd euro exchange rate the focus is on oil price returns which have been previously found to exert mostly negative effects on u s stock returns identifying the crisis of 2008 2009 as a significant period of economic contraction and subsequent recovery we check the stability of the stock oil relationship by garch and mgarch dcc models prior to the financial crisis stock returns are slightly negatively affected by oil prices and by the usd euro for the subsample of mid 2009 onwards however stock returns are positively affected by oil prices and a weaker usd euro as with inflation expectations we interpret these findings as u s stocks responding positively to expectations of recovery worldwide our proposed explanation is due to the changing correlation between stock markets and oil either by standard garch models or by mgarch dcc models allowing the implied correlation to vary over time

forecasting stock return variance toward an understanding of stochastic implied volatilities we examine the behavior of measured variances from the options market and the underlying stock market under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model forecasts from time series models of the stockreturn process should not have predictive content given the market forecast as embodied in option prices both in sample and out of sample tests suggest that this hypothesis can be rejected using simulations we show that biases inherent in the procedure we use to imply variances cannot explain this result thus we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced these results also have implicationsfor optimal variance forecast rules

a comparative analysis of funding schemes for public infrastructure spending in quebec the economic literature has been investigating the positive relation between public infrastructure spending and the productivity of the private sector since munnell 1992 we have introduced this relationship into a recursive dynamic computable general equilibrium model of the quebec economy to investigate various funding schemes to scale up infrastructure spending in the province we draw our assumptions from estache et al 2010 combined with sectoral elasticity parameters we conduct a comparative analysis where the funding comes from debt alone and debt with sales tax income tax and business tax our main finding is that the income tax seems to produce the most positive effects and the businesses tax the most negative effects though differences are small

does vix or volume improve garch volatility forecasts abstractthis article considers whether the inclusion of two additional variables can improve volatility forecasts over a standard garch based model we consider three alternative ways of incorporating the volatility index vix and trading volume as exogenous variables within a selection of garch models we are particularly interested in whether these variables have additional incremental forecast power over and above the baseline garch specification our results suggest that both the vix and volume do provide some additional forecast power and this is generally improved when considering both of these series jointly in the model however while the results may be statistically significant the gain is marginal and the coefficient values small moreover in a horse race exercise vix does not outperform the garch approach in answering the question of whether vix produces better forecasts than the garch model then the answer is no but the informational content of vix cannot be ignored and should be incorp

the impact of trades on daily volatility this article proposes a trading based explanation for the asymmetric effect in daily volatility of individual stock returns previous studies propose two major hypotheses for this phenomenon leverage effect and time varying expected returns however leverage has no impact on asymmetric volatility at the daily frequency and moreover we observe asymmetric volatility for stocks with no leverage also expected returns may vary with the business cycle that is at a lower than daily frequency trading activity of contrarian and herding investors has a robust effect on the relationship between daily volatility and lagged return consistent with the predictions of the rational expectation models the non informational liquidity driven herding trades increase volatility following stock price declines and the informed contrarian trades reduce volatility following stock price increases the results are robust to different measures of volatility and trading activity jel c30 g11 g12 stock return volatility is fundamental to finance contingent claims pricing risk management asset allocation and market efficiency tests use volatility as a basic building block consequently volatility has been widely studied along several dimensions volatility clustering in financial data has been well documented and extensively modeled by the autoregressive conditional heteroskedasticity arch of engle 1982 and the generalized arch extension of bollerslev 1986 1 shiller 1981 leroy and porter 1981 roll 1984 1988 french and roll 1986 and cutler poterba and summers 1989 have all documented a significant amount of volatility that cannot be explained by changes in fundamentals and thus may be attributable to mispricing schwert 1989 has studied the variation in stock market volatility over time and has analyzed the

shifts in volatility driven by large stock market shocks abstract this paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns known as structural breaks these shifts are endogenously driven by large return shocks innovations reflecting large pieces of market news these shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model one for the negative shocks and one for the positive shocks the model can be employed to investigate different sources of stock market volatility shifts driven by market news without relying on exogenous information in addition to this it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility the above properties of the model are shown based on a study for the us stock market volatility

roads to prosperity assessing the link between public capital and productivity does the positive correlation between infrastructure and productivity reflect causation if so in which direction the author finds that when growth in roads the largest component of infrastructure changes productivity growth changes disproportionately in u s industries with more vehicles that vehicle intensive industries benefit more from road building suggests that roads are productive at the margin however road investments do not appear unusually productive intuitively the interstate system was highly productive but a second one would not be road building thus explains much of the productivity slowdown through a one time unrepeatable productivity boost in the 1950s and 1960s

economic perspectives on privatization despite being one of the most fundamental issues in political economy the question of the appropriate boundary between public and private enterprise received relatively little attention in mainstream economic analysis until quite recently in the 1980s however programs of ownership reform were started in many developed and developing countries dramatic though some of these policies have been they are likely to be overshadowed in the 1990s by even greater privatization in the reforming socialist economies the opening sections of this paper are organized around three broad and interrelated questions how does ownership matter for the efficiency of enterprise performance what is the role for privatization in financing public debts and deficits what are the distributional and political implications of privatization finally we examine privatization in practice in three countries britain chile and poland

from global savings glut to financing infrastructure summary samama and joseph stiglitz this paper proposes an institutional solution that can help unlock the flow of low yielding long term savings towards high return infrastructure investments the solution is to transform public private partnerships ppps in infrastructure as well as the classic model of multilateral development banks instead of thinking of ppps as bilateral contracts between a private concession operator and a government agency we argue that they should be conceived as partnerships that also involve a development bank and long term institutional investors as partners we propose a new model for development banks which is to transform them into originate and distribute banks for ppp infrastructure projects the new model allows them to conserve their valuable capital and leverage their expertise and capabilities by making them available to long term institutional investors

pricing of long dated commodity derivatives do stochastic interest rates matter abstract does modelling stochastic interest rates beyond stochastic volatility improve pricing performance on long dated commodity derivatives to answer this question we consider futures price models for commodity derivatives that allow for stochastic volatility and stochastic interest rates and a correlation structure between the underlying variables we examine the empirical pricing performance of these models on pricing long dated crude oil derivatives estimating the model parameters from historical crude oil futures prices and option prices we find that stochastic interest rate models improve pricing performance on long dated crude oil derivatives when the interest rate volatility is relatively high furthermore increasing the model dimensionality does not tend to improve the pricing performance on long dated crude oil option prices but it matters for long dated futures prices we also find empirical evidence for a negative correlation between crude oil futures prices and interest rates that contributes to improving fit to long dated crude oil option prices