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

fdi as an outcome of the market for corporate control theory and evidence abstract much foreign direct investment fdi takes the form of mergers and acquisitions m a it is commonplace in finance to view acquisitions as manifestations of the market for corporate control following on that insight we propose a model of fdi in which headquarters bid to control overseas assets we derive an equation for bilateral fdi stocks that resembles the recently developed fixed effects approach to modelling bilateral trade flows we estimate the model and use its parameters to construct benchmarks for evaluating multilateral inward and outward fdi

similarities in the distribution of stock market price changes between the eighteenth and twentieth centuries are all financial time series alike this article raises that question by establishing that eighteenth and twentieth century equity market time series behave similarly the distribution of price changes now and then both exhibit the same patterns or regularities in particular the distribution of price changes is leptokurtic and fluctuations in variance are persistent this article provides further evidence that financial market regularities are stable and not contingent on specific times and places the historical evidence shows that eighteenth century stock market and traders are not so different from those of today copyright 1998 by university of chicago press

why derivatives need models the political economy of derivative valuation models derivatives markets continue to turn over enormous volumes and are an important part of financialised capitalism in the early twenty first century a surprising and yet key feature of these large and apparently liquid markets is that they seem to be bound up with the widespread use of mathematical valuation and risk management models by market participants the paper investigates derivative models and risk management by highlighting the grounds for their emergence their establishment and their influence on market developments a political economy of derivatives markets provides insights into the essential nature of derivatives defining them against the material circumstances in which they arise and allows the logical development of valuation models and risk management as the necessary complement to the large scale derivatives markets that have developed since the 1980s the paper builds from finding prices for potential new trades to valuing completed trades and risk managing portfolios to show how and why valuation models and risk management are bound up with today s derivatives markets

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

the market for equity options in the 1870s the introduction of exchange traded options in 1973 led to explosive growth in the stock options market but put and call options on equity securities have existed for more than a century prior to the listing of option contracts trading was conducted in an order driven over the counter market from 1873 to 1875 quotes for options contracts were published weekly in the commercial and financial chronicle during a period that saw extensive marketing efforts by a number of brokerage firms in this article we examine these quotes to determine why this seemingly sophisticated market existed for only a brief period in financial history in 1973 exchange traded options were introduced and for the first time a central marketplace was available for the trading of standardized option contracts in addition the creation of the options clearing corporation provided an intermediary to all contracts the volume of options traded has exploded during the past twenty three years as has our understanding of the pricing of options and other derivative securities put and call options on equity securities however have been available to american investors for more than a century following the civil war an active market in privileges the term then used for options1 developed in new york city with numerous brokerage firms offering put call and double privilege contracts this market reached the height of its activity in the period from 1873 through 1875 during that time indicative price quotes from a particular broker for options on about a dozen equity securities were generally published every saturday in the commercial and financial chronicle these quotes were placed along with the other financial data for the week including daily high and low stock prices bond prices gold prices money

emerging market spreads then versus now we analyze yield spreads on sovereign bonds issued by emerging markets using modern data from the 1990s and newly collected historical data on bonds traded in london during 1870 1913 a previous era of global capital market integration we show that spreads today comove across emerging markets to a significantly higher degree than they did in the historical sample moreover sharp changes in spreads in the 1990s tend to be mostly related to global events whereas they were primarily related to country specific events in 1870 1913 although we find that fundamentals comove somewhat more strongly today than they did in the past we conjecture that today s investors pay less attention to country specific events than their predecessors did

optimal portfolios under a value at risk constraint abstract this paper looks at the optimal portfolio problem when a value at risk constraint is imposed this provides a way to control risks in the optimal portfolio and to fulfil the requirement of regulators on market risks the value at risk constraint is derived for n risky assets plus a risk free asset and is imposed continuously over time the problem is formulated as a constrained utility maximization problem over a period of time the dynamic programming technique is applied to derive the hamilton jacobi bellman equation and the method of lagrange multiplier is used to tackle the constraint a numerical method is proposed to solve the hjb equation and hence the optimal constrained portfolio allocation under this formulation we find that investments in risky assets are optimally reduced by the imposed value at risk constraint

emissions leakage environmental policy and trade frictions abstract we develop a two good general equilibrium model of a small open economy to decompose the effect of a country s unilateral strengthening of environmental policy on pollution emissions in the rest of the world known as emissions leakage we show analytically and numerically that the level of emissions leakage depends on the level of trade friction in the service sector in the model production in the manufacturing sector is associated with pollution emissions and production in the service sector is clean in a special case with free trade in manufacturing and no trade in services no leakage occurs allowing for trade in services we solve for the relationship between trade frictions in the service sector and leakage at lower levels of service sector s trade friction leakage from a small strengthening of environmental regulation decreases increases if services are imported exported finally we simulate the model calibrating the to the canadian economy to compare these effects relative sizes over a range of plausible parameter values leakage is about 18 lower when using trade friction levels estimated from the literature rather than assuming no trade friction in services

the paradox of preferences regional trade agreements and trade costs in services abstract this paper analyzes the relationship between regional trade integration and trade costs in services industries the empirical analysis relies on the one hand on a dataset of theory consistent bilateral trade costs calculated for 55 countries over the period 1999 2009 and on the other hand on an analysis of services commitments in 66 regional trade agreements to which these countries are parties despite the proliferation of services rtas in the past decade we find that trade costs are only slightly lower due to the impact of these agreements in addition we find that the trade cost reductions that do take place tend to happen before the agreement is signed this mechanism is consistent with countries using services rtas as a way of locking in reforms finally we find that the preferential margin of services rtas is quite thin members and non members both see slightly lower trade costs when an rta is signed we discuss the possible explanations for these findings in terms of the nature of services rtas and their relationship with regulatory reform in signatory countries based on these results we argue that regionalism in the case of services seems relatively non discriminatory and does not lead to substantial trade preferences

third country effects of regional trade agreements does regionalism negatively impact non members to answer this question we examine the effect of regional trade agreements rtas on imports from non members and the tariffs that they face using data from six rtas in latin america and europe we do not find evidence that implementation of the regional agreements is associated with trade diversion from third countries to regional members using detailed industry data on preference margins and most favoured nation mfn tariffs for three trade agreements in latin america over 12 years we find that greater preference margins do not significantly reduce imports from third countries we also look at the effect of preferences on external tariffs we find evidence that preferential tariff reduction tends to precede the reduction of external mfn tariffs in a given sector offering evidence of tariff complementarity overall the results suggest that regionalism does not significantly harm non members

the behavior of volatility expectations and their effects on expected returns this article examines the behavior of common stock return volatility forecasts implied by call option prices and studies the relationship between implied volatilities and stock returns the author estimates a model that integrates the findings of previous theoretical and empirical research the author finds that implied volatilities are significantly positively related to forecasts of market return volatility and to recent realizations of stock and market volatilities the author s model is able to capture much of the previously unexplained cross sectional and serial correlation in implied volatilities moreover stock returns are found to be significantly positively related to lagged implied volatilities copyright 1993 by university of chicago press

stock price volatility mean reverting diffusion and noise abstract using weekly call option prices on twenty five stocks over a ten year period 1975 1985 and calls on the s p 500 stock index futures we find that ex ante market volatility follows a mixed mean reverting diffusion with noise process changes in volatility are correlated across stocks and a marketwide volatility effect is found strong forces pull the volatility back to its long term value the findings suggest the development of new option pricing models

constructing a market performing theory the historical sociology of a financial derivatives exchange this analysis of the history of the chicago board options exchange explores the performativity of economics a theme in economic sociology recently developed by callon economics was crucial to the creation of financial derivatives exchanges it helped remedy the drastic loss of legitimacy suffered by derivatives in the first half of the 20th century option pricing theory a crown jewel of neoclassical economics succeeded empirically not because it discovered preexisting price patterns but because markets changed in ways that made its assumptions more accurate and because the theory was used in arbitrage the performativity of economics however has limits and an emphasis on it needs to be combined with classic themes in economic sociology such as granovetterian embedding and the way in which exchanges can be cultures and moral communities in which collective action problems can be solved

the price of options illiquidity the purpose of this paper is to examine the effect of illiquidity on the value of currency options we use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity the value of these options is compared to similar options traded on the exchange we find that the nontradable options are priced about 21 percent less than the exchange traded options this gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process

the saga of the first stock index futures contract benchmarks models and learning in the presence of imperfect or perturbed benchmarks pricing based on relative valuation or arbitrage can be affected adversely this study highlights persistent pricing irregularities in the kansas city value line kcvl stock index futures market this contract is especially interesting because the underlying benchmark underwent a midstream change in definition from a complex equally weighted geometric index to an equally weighted arithmetic index empirical analysis reveals that during a four year period the market displayed herd like behavior and priced the kcvl geometric contract using the simple but wrong cost of carry benchmark model a dramatic change occurs around the publication of the eytan harpaz 1986 model when the market turns efficient from the perspective of this new model the market appears to have succumbed initially to a bad information cascade primarily because arbitrage was difficult to understand and carry out under complex benchmarking the evidence provides empirical extension to the observational social learning paradigms of simon 1955 banerjee 1992 and bikhchandani hirshleifer and welch 1992 that lead to behavioral herding and information cascades

a knowledge and physical capital model of international trade flows foreign direct investment and multinational enterprises abstract this paper addresses two important issues at the nexus of the literatures on international trade foreign direct investment fdi foreign affiliate sales fas and multinational enterprises mnes first the introduction of a third internationally mobile factor physical capital to the standard 2 2 2 knowledge capital model of mnes with skilled and unskilled labor allows us to resolve fairly readily the puzzle in the modern mne literature that foreign affiliate sales among two identical economies completely displace their international trade intra industry trade and intra industry fdi and fas can coexist for national and multinational firms with identical productivities in identical countries second the introduction also of a third country to the model suggests a formal n country theoretical rationale for estimating gravity equations of bilateral fdi flows and fas in a manner consistent with estimating gravity equations for bilateral trade flows

nonparametric tests of alternative option pricing models using all reported trades and quotes on the 30 most active cboe option classes from august 23 1976 through august 31 1978

the bitcoin options market a first look at pricing and risk this paper offers the first ever look at bitcoin options by investigating the wedge between optimum bitcoin option prices based on classical option valuation models black scholes merton and the he