s p 500 cash stock price volatilities s p 500 stock return volatilities are compared to the volatilities of a matched set of stocks after controlling for cross sectional differences in firm attributes known to affect volatility no significant difference in volatility is observed between 1975 and 1983before the start of trade in index futures and index options since then s p 500 stocks have been relatively more volatile the difference is statistically but not economically significant the relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns other factors besides the start of derivative trade could be responsible for the small increase in volatility stock price volatility has received much attention in the popular press over the last few years especially since the october 19 1987 stock market crash the rise in volatility has alarmed investors regulators and the public in general some suggest that the start of trade in stock index futures and index options increased speculative activity that in turn destabilized cash markets causing higher volatility large trading activity in the derivative contracts makes the suggestion plausible volume in index futures and index options increased dramatically since their introductions in 1982 and 1983 by 1987 the average daily dollar volume in the s p 500 futures contracts alone exceeded the dollar volume of cash s p 500 trade by a factor of about two while the dollar value of the daily net change in total open interest is about 8 of s p 500 stock dollar volume speculative trade in futures and options frequently is accused of destabilizing underlying cash markets the charge has been made for more than a century in the agricultural precious metal and currency markets recent evidence by french and roll 1986 showing stock variance to be strongly related to trading session hours heightens these concerns unfortunately theoretical analyses of whether speculative trade destabilizes cash markets lead to conflicting conclusions depending on what assumptions are made 1 school of business administration university of southern california and office of economic analysis u s securities and exchange commission i wish to thank mary denny mcsweeny and steve hornstein for their valuable research assistance and the referee and editor for their many suggestions and insights the opinions expressed in this paper do not necessarily reflect those of the u s securities and exchange commission or those of the author s colleagues on its staff an increase in well informed speculative trade has two opposite effects on measured volatility it decreases volatility due to order flow imbalances caused by uninformed traders because informed traders provide liquidity in such events and it increases volatility due to new fundamental information since the information which is assumed to be generated at discrete time intervals is impounded into

environmental and economic effects of the copenhagen pledges and more ambitious emission reduction targets abstract a multi region multi sector dynamic computable general equilibrium model is applied to explore the economic and welfare effects of the pledges submitted by developed countries annex i countries and major developing non annex i countries for 2020 under the copenhagen accord in addition to analyzing scenarios reflecting the upper and lower bounds of the copenhagen pledges one additional policy scenario where annex i countries as a group reduce co 2 emissions by 30 in 2020 compared to 1990 levels and where major non annex i countries reduce co 2 emissions 15 below baseline is also analyzed economic effects are measured as changes in gdp compared to baseline and welfare effects are measured via the equivalent variation assuming that countries with emission targets may trade certificates average reductions in gdp for countries with targets range between 0 1 and 0 7 in 2020 for the policy scenarios while the gdp losses are larger for major non annex i countries with emission targets compared to annex i countries this is not the case for the changes in welfare with the exception of mexico the welfare losses for the major non annex i regions as a percentage of projected gdp in 2020 are lower than for the large annex i countries

a time varying copula approach to oil and stock market dependence the case of transition economies abstract we employ the time varying copula approach to investigate the conditional dependence between the brent crude oil price and stock markets in the central and eastern european cee transition economies our results show evidence of a positive dependence between the oil and the stock markets of the six cee countries which is indicative of a contagion between those markets regardless of the changes in the oil price or the cee stock index moreover the dependence patterns in both the center and left tails of the return distributions change over time particularly during the heart of the financial crisis and are best described by the survival gumbel copulas the empirical evidence also suggests that the lower tail dependence is much stronger than that of the upper tail highlighting the importance of contagion during severe contractionary business cycles among the sample markets poland is shown to be particularly sensitive in this regard while hungary and slovenia are the least sensitive

on the frequency of large stock returns putting booms and busts into perspective textabstractnumerous articles have investigated the distribution of share prices and find that the returns are fat tailed nevertheless there is still controversy about the amount of probability mass in the tails and hence about the most appropriate distribution to use in modeling returns this controversy has proven hard to resolve as the alternatives are non nested we employ extreme value theory focusing exclusively on the larger observations in order to assess the tail shape within a unified framework we find that at least the first two moments exist this enables one to generate robust probabilities on large returns which put the recent stock market swings into historical perspective

modeling the co movements between crude oil and refined petroleum markets abstract in this paper we investigate two types of asymmetries i e the asymmetry in the lower and upper tail dependences and the asymmetry in the propagation of crisis bubble between crude oil market and refined petroleum markets based on copula models thirteen copula models with different types of dependence structures and time varying dependence parameters are considered we find that in general the malm copula fits our sample data best based on aic criterion we find that lower and upper tail dependences are both positive indicating that crude oil and refined product markets tend to move together using the asymmetric copulas we find asymmetry in tail dependence between crude oil and heating oil returns and that between crude oil and jet fuel returns interestingly upper tail dependence is significantly greater than the lower tail dependence for the pre crisis period while the result is reversed for the post crisis period finally although our data prefers the nonexchangeable malm copula the asymmetry in the propagation of crisis bubble between crude oil and refined product returns is very weak

is volatility clustering of asset returns asymmetric abstract volatility clustering is a well known stylized feature of financial asset returns this paper investigates asymmetric pattern in volatility clustering by employing a univariate copula approach of chen and fan 2006 using daily realized kernel volatilities constructed from high frequency data from stock and foreign exchange markets we find evidence that volatility clustering is highly nonlinear and strongly asymmetric in that clusters of high volatility occur more often than clusters of low volatility to the best of our knowledge this paper is the first one to address and uncover this phenomenon in particular the asymmetry in volatility clustering is found to be more pronounced in the stock markets than in the foreign exchange markets further the volatility clusters are shown to remain persistent for over a month and asymmetric across different time periods our findings have important implications for risk management a simulation study indicates that models which accommodate asymmetric volatility clustering can significantly improve the out of sample forecasts of value at risk

financial innovation and information the role of derivatives when a market for information exists we study the effects of financial innovation in a model of endogenous information acquisition we determine the conditions under which the introduction of a derivative written on an existing stock increases or decreases the incentive to purchase information we show that financial innovation produces some effects which hold across informational structures and others which differ the former coincide with the few empirical results that are robust in the literature effects on prices risk premia and volatility while the latter coincide with the ones that differ experiment by experiment effects on volume correlation between volume and volatility and market informational efficiency copyright 2002 oxford university press

exchange traded funds a new investment option for taxable investors exchange traded funds etfs are a new variety of mutual fund that first became available in 1993 etfs have grown rapidly and now hold nearly 80 billion in assets etfs are sometimes described as more tax efficient than traditional equity mutual funds since in recent years some large etfs have made smaller distributions of realized and taxable capital gains than most mutual funds this paper provides an introduction to the operation of exchange traded funds it also compares the pre tax and post tax returns on the largest etf the spdr trust that invests in the s p500 with the returns on the largest equity index fund the vanguard index 500 the results suggest that between 1994 and 2000 the before and after tax returns on the spdr trust and this mutual fund were very similar both the after tax and the pre tax returns on the fund were slightly greater than those on the etf these findings suggest that etfs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low cost index funds this abstract was borrowed from another version of this item

hedging index exchange traded funds this paper presents an empirical comparison of the out of sample hedging performance from naive and minimum variance hedge ratios for the four largest us index exchange traded funds etfs efficient hedging is important to offset long and short positions on market maker s accounts particularly imbalances in net creation or redemption demands around the time of dividend payments our evaluation of out of sample hedging performance includes aversion to negative skewness and excess kurtosis the results should be of interest to hedge funds employing tax arbitrage or leveraged long short equity strategies as well as to etf market makers

the extreme value in crude oil and us dollar markets abstract this study constructs a flexible range based volatility model by considering extreme value information to explore the volatility and dependence structures between the oil price and the us dollar exchange rate an asset allocation strategy is implemented to evaluate the economic value and confirm the efficiency of this model the empirical results indicate that the use of extreme value information can not only enhance the explanatory power of volatility structures but also sort out the asymmetric volatility effect in the oil market besides investors can obtain extra benefits of between 72 and 713 annualized basis points by incorporating extreme value information into their asset allocation strategies less risk averse investors can generate higher benefits the empirical results have potentially important implications for asset allocation and risk management

performance of technical analysis in growth and small cap segments of the us equity market abstract a large universe of technical trading rules applied to a set of technology industry and small cap sector portfolios over the 1995 2010 period yields superior predictability after adjusting for data snooping bias in the first half of the sample period and delivers statistically significant profits for a number of portfolios when the transaction cost is assumed to be of small to moderate size technical analysis is not able to outperform the buy and hold approach for any portfolio in the set in the second half of the sample period the finding that the short term return predictability becomes much weaker in the more recent period suggests that the underlying segments of the equity market have become more efficient over time the fact that mechanical trading strategies have been futile after adjusting for data snooping bias for two samples of portfolios where technical analysis is most anticipated to succeed suggests that it is unlikely to have delivered abnormal returns in any other segment of the domestic equity market in the last decade

estimates of ghg emission reduction potential by country sector and cost abstract in this study emission reduction potentials in greenhouse gases ghg are assessed by country sector and cost using a ghg emission reduction assessment model with high resolutions with respect to region and technology and high consistency in terms of assumptions interrelationships and solution principles model analyses show that large potential reductions can be achieved at low cost in developing countries and power sectors in addition cost efficient emission reductions were evaluated for some international emission reduction targets that have been derived on the basis of the principle of common but differentiated responsibilities among developed and developing countries if 1 emission reduction measures at negative costs and below 50 tco 2 for developed countries 2 intensity improvement measures for selected sectors at negative costs and below 20 tco 2 for major developing countries and 3 all emission reduction measures with negative costs for other developing countries in 2020 are adopted then emission reductions of 8 9 14 8 and 27 7 gtco 2 eq yr compared to the technology frozen case can be expected in developed countries major developing countries and globally corresponding to a 11 decrease 40 increase and 17 increase from 2005 levels respectively large scale emission reductions can be achieved even if co 2 intensity targets for major sectors are assumed for major developing countries

the time variation of risk and return in the foreign exchange and stock markets this paper attempts to determine whether the fluctuations of conditional first and second moments which are observed for many assets are consistent with the sharpelintner mossin capital asset pricing model we test the mean variance model under several different assumptions about the time variation of conditional second moments of returns using weekly data from july 1974 to december 1986 that include returns on a portfolio composed of dollar deutsche mark sterling and swiss franc assets together with the u s stock market the results indicate that estimated conditional variances cannot explain the observed time variation of risk premia rates of return on international financial assets are characterized by statistical properties that are quite common to all financial markets they are highly volatile and largely unpredictable these properties make it very difficult to extract statistically reliable estimates of systematic exchange rate and assetprice movements and are at the root of the generally poor empirical performance of international asset pricing models nevertheless two important results have been uncovered by empirical researchers and can be considered a fair characterization of the data a expected returns on foreign assets vary over time cumby and obstfeld 1981 and the numerous articles that followed recently surveyed by frankel and meese 1987 b the volatility of returns of foreign assets also changes over time cumby and obstfeld 1984 hodrick and srivastava 1984 and hsieh 1988 among others as giovannini and jorion 1987 suggest the

dependence and extreme dependence of crude oil and natural gas prices with applications to risk management abstract in this article we show how the copula garch approach can be appropriately used to investigate the conditional dependence structure between the crude oil and natural gas markets as well as to derive implications for portfolio risk management in extreme economic conditions using daily price data from january 1997 to october 2011 our in sample results show evidence of asymmetric dependence between the two markets the crude oil and gas markets tend to comove closely together during bullish periods but not at all during bearish periods moreover taking the extreme comovement into account leads to an improvement in the accuracy of the out of sample value at risk forecasts

does futures trading increase stock market volatility 1988 does futures trading increase stock market volatility financial analysts journal vol 44 no 1 pp 63 69

international diversification an extreme value approach abstract international diversification has costs and benefits depending on the degree of asset dependence we study international diversification with two dependence measures correlations and extreme dependence we discover that dependence has typically increased over time and document mixed evidence on heavy tails in individual countries moreover we uncover three additional findings related to dependence first the timing of downside risk differs depending on the region surprisingly recent latin american returns exhibit little downside risk second latin america exhibits a great deal of correlation complexity third according to the empirical results correlation does not vary with returns but extreme dependence does vary monotonically with regional returns our results are consistent with a tradeoff between international diversification and systemic risk they also suggest international limits to diversification and that international investors demand some compensation for joint downside risk during extreme events

futures trading information and spot price volatility evidence for the ftse 100 stock index futures contract using garch abstract this paper examines the impact of trading in the ftse 100 stock index futures on the volatility of the underlying spot market to examine the relationship between information and volatility as subject neglected in previous studies the garch family of techniques is used the results suggest that futures trading has led to increased volatility but that the nature of volatility has not changed post futures the finding of price changes being integrated pre futures but being stationary post futures implies that the introduction of futures has improved the speed and quality of information flowing to the spot market

stock index futures and index arbitrage in a rational expectations model this article analyzes the role of stock index futures and index arbitrage in a rational expectations economy with competitive stock and futures markets a simple model is developed with three types of agents who besides having different trading motives have unequal access to markets among these agents only index arbitrageurs can trade on both markets and thus engage in arbitrage the article characterizes the impact of index arbitrage on equilibrium prices volatilities and welfare it is shown that index arbitrage is a risk reallocating and price correcting mechanism its impact on price stability is shown to be dependent on the relative variability of aggregate supply in the respective markets index arbitrage also transmits information across markets copyright 1991 by university of chicago press

dependence structure between the equity market and the foreign exchange market a copula approach abstract this paper investigates the dependence structure between the equity market and the foreign exchange market by using copulas in particular several copulas with different dependence structure are compared and used to directly model the underlying dependence structure we find that there exists significant symmetric upper and lower tail dependence between the two financial markets and the dependence remains significant but weaker after the launch of the euro our findings have important implications for both global investment risk management and international asset pricing by taking into account joint tail risk

do food and oil prices co move abstract this paper studies co movements between world oil prices and global prices for corn soybean and wheat using copulas several copula models with different conditional dependence structures and time varying dependence parameters were considered empirical results for weekly data from january 1998 to april 2011 showed weak oil food dependence and no extreme market dependence between oil and food prices these results support the neutrality of agricultural commodity markets to the effects of changes in oil prices and non contagion between the crude oil and agricultural markets however dependence increased significantly in the last three years of the sampling period even though upper tail dependence remained insignificant indicating that food price spikes are not caused by positive extreme oil price changes these results have implications for policy design risk management and hedging strategies

assessment of copenhagen pledges with long term implications abstract this study first evaluates the pledges under the copenhagen accord using the dne21 model our estimates for the 2020 pledges fall collectively within the range of 46 700 49 100 mt co 2 eq our study also finds the efforts arising from the current 2020 pledges have wide ranging implications in terms of mitigation costs and types of actions based on this analysis we seek to place the copenhagen pledges in a long term context putting focus on costs and feasibility we set up a carbon prices convergence scenario assuming that all countries start from the copenhagen commitments and gradually undertake their own individual efforts in accordance with the convergence of carbon prices toward a uniform price in 2050 despite soaring carbon prices in most countries total costs as share of gdp show modest increase ranging mostly between 0 and 0 4 we also find that there does not seem to be much difference in the degree of burden between developed and major developing countries under this scenario since the challenge of climate change will require significant reductions in ghg emissions in the coming decades we need to make long lasting efforts getting on the right track toward the ultimate goal of stabilizing ghgs

regulatory and legal pressures and the costs of nasdaq trading the nasdaq market came under intense pressure from regulators and class action lawsuits following allegations of tacit collusion by christie and schultz 1994 this article examines the changes in transaction costs on the nasdaq from january 1993 through june 1996 using 16 million trades in 30 stocks effective spreads cannot be matched however the autocovariance spread estimator of roll 1984 works well with intraday data over this period this spread estimator reveals that trading costs declined significantly for 29 of the 30 stocks over 1993 96 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

information and index arbitrage a random cash futures basis is derived in a dynamic multimarket learning game with sequential information shocks and strategic arbitrageurs who trade to exploit gaps in the basis statistical properties of the authors theoretical basis are derived both with and without index arbitrage the authors find that basis volatility a measure of intermarket mispricing may initially increase even as individual prices become more precise and that arbitrage reduces basis volatility the model is also used to analyze regulatory issues such as the possible impact of circuit breakers on the quality of the trading process copyright 1994 by university of chicago press

commodity and equity markets some stylized facts from a copula approach abstract in this paper we propose to identify the dependence structure that exists between returns on equity and commodity futures and its development over the past 20 years the key point is that we do not impose any dependence structure but let the data select it to do so we model the dependence between commodity metal agriculture and energy and stock markets using a flexible approach that allows us to investigate whether the co movement is i symmetrical and frequent ii a symmetrical and mostly present during extreme events and iii asymmetrical and mostly present during extreme events we also allow for this dependence to be time varying from january 1990 to february 2012 our analysis uncovers three major stylised facts first we find that the dependence between commodity and stock markets is time varying symmetrical and occurs most of the time as opposed to mostly during extreme events second not allowing for time varying parameters in the dependence distribution generates a bias towards an evidence of tail dependence similarly considering only tail dependence may lead to false evidence of asymmetry third a growing co movement between industrial metals and equity markets is identified as early as 2003 this co movement spreads to all commodity classes and becomes unambiguously stronger with the global financial crisis after fall 2008

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

a currency preferential approach to international equity investment we propose a timex strategy for reducing the foreign exchange risk associated with international equity investment pertaining to countries with currencies correctly or undervalued by the standard of ppp the performance of timex is examined from the perspectives of eight developed nations with long histories of free floating currencies based on the data from 1986 q1 to 2014 q4 we find unambiguous evidence for the superior performance of timex in the foreign exchange market compared with the passive diversification strategy and the morgan stanley capital international msci world index timex offers higher total returns and risk adjusted total returns when rebalanced every 6 or 12 months for investors based in all eight countries under study when rebalanced at a 3 year interval timex outperforms the passive diversification and the msci world index for five and all eight countries respectively

energy system impacts and policy implications of the european intended nationally determined contribution and low carbon pathway to 2050 in march 2015 the european union eu submitted to the united nations framework convention on climate change unfccc the intended nationally determined contribution indc in view of the paris conference of parties cop21 the binding target of lowering domestic greenhouse gases emissions by at least 40 by 2030 compared to 1990 levels coupled with long term decarbonisation goals will have profound energy system macroeconomic and policy implications eu targets are qualitatively discussed and quantitatively assessed with the simulation of a reference and an alternative decarbonisation scenario to 2050 simulations are carried out with the technology rich primes energy system model and the gem e3 computable general equilibrium model restructuring of the eu energy system induces changes in the energy mix and production with small effects on the eu gdp 0 4 in 2030 and 1 in 2050 compared to the reference scenario energy efficiency improvements increasing penetration of renewables fuel switching towards natural gas and technical progress in process related to emissions abatement are identified as essential options to the eu indc implementation the electrification of final energy demand particularly transport electrification complemented with decarbonised power supply is found to play a critical role in the successful transition towards a low carbon economy by 2050

when does the stock market listen to economic news new evidence from copulas and news wires we study association between macroeconomic news and stock market returns using the statistical theory of copulas and a new comprehensive measure of news based on textual review and classification of news wires we find the impact of economic news on equity returns to be nonlinear and asymmetric in particular controlling for economic conditions and surprises associated with releases of economic data we find that the market reacts strongly and negatively to the most unfavourable macroeconomic news but appears to largely discount the good news further the most unfavorable news creates price drift and we document that selling stocks short in the wake of unusually bad news yields annual abnormal gross returns greater than four percent

uncertainty and crude oil returns we use a copula approach to investigate the effect of uncertainty on crude oil returns using copulas to construct multivariate distributions of time series data permit the calculation of the dependence structure between the series independently of the marginal distributions further we implement the copula estimation using a rolling window method to allow for a time varying effect of equity and economic policy uncertainty on oil returns the results show that higher uncertainty as measured by equity and economic policy uncertainty indices significantly increase crude oil returns only during certain periods of time that is we find a positive dependence prior to the financial crisis and great recession interestingly estimation of the copula over the entire sample period leads to a negative dependence between the equity and economic policy indices and the crude oil return

co dependence of extreme events in high frequency fx returns in this paper we investigate extreme events in high frequency multivariate fx returns within a purposely built framework we generalize univariate tests and concepts to multidimensional settings and employ these novel techniques for parametric and nonparametric analysis in particular we investigate and quantify the co dependence of cross sectional and intertemporal extreme events we find evidence of the cubic law of extreme returns their increasing and asymmetric dependence and of the scaling property of extreme risk in joint symmetric tails

comparing model results to national climate policy goals results from the asia modeling exercise abstract while the world has yet to adopt a single unified policy to limit climate change many countries and regions have adopted energy and climate policies that have implications for global emissions in this paper we discuss a few key policies and how they are included in a set of 23 energy and integrated assessment models that participated in the asia modeling exercise we also compare results from these models for a small set of stylized scenarios to the pledges made as part of the copenhagen accord and the goals stated by the major economies forum we find that the targets outlined by the united states the european union japan and korea require significant policy action in most of the models analyzed for most of the models in the study however the goals outlined by india are met without any climate policy the stringency of climate policy required to meet china s copenhagen pledges varies across models and accounting methodologies

technological change and the timing of mitigation measures we use a coupled carbon cycle and energy systems engineering model to analyze the future time path of carbon emissions under an illustrative co2 concentration stabilization limit of 550 ppm our findings confirm the emission pattern as found by wre global emissions rise initially pass through stabilization in order to decline in the second half of the 21st century we show that for a given co2 concentration target emission trajectories within an intertemporal optimization framework depend mainly on two factors the discount rate and the representation of technological change as either static or dynamic we obtain a similar near term emission time path as wre when using a model with static technology and a discount rate of 7 we obtain a trajectory with lower emissions in the near term when using a lower discount rate and or treating technology dynamics endogenously in the model we briefly outline a model that endogenizes technological change through learning curves we then compare differences in emission trajectories between alternative model formulations of technological change they are sufficiently small as to be of secondary importance when compared to treating co2 concentration stabilization as an inter temporal optimization problem or not whereas our results confirm the computational results of wre we arrive nonetheless at different policy conclusions if long term emission reduction is the goal we cannot follow business as usual even in the short term action needs to start now action does not necessarily mean aggressive short term emission reductions but rather enhanced r d and technology demonstration efforts that stimulate technological learning these are the necessary preconditions that long term reduction targets can be met with improved technology and at costs lower than today we close by pointing out two further critical issues uncertainty and the possible mismatch between the world of economic models and that of climate policy

the market liquidity of diamonds q s and their underlying stocks abstract we investigate the market liquidity effects of the introduction of index tracking stocks for the dow jones industrial average diamonds and the nasdaq 100 index q s our main finding is liquidity of the underlying djia 30 index stocks improves after the introduction of the exchange traded fund largely because of a decline in the cost of informed trading further we find the diamonds has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks again primarily because of lower adverse selection costs finally we find weaker but qualitatively similar results for the q s

risk spillover between energy and agricultural commodity markets a dependence switching covar copula model abstract unlike previous studies we employ a relatively newer modelling technique a time varying copula with a switching dependence to characterise the conditional dependence between energy and agricultural commodity markets in a more realistic way because the dependence may switch between positive and negative correlation regimes over time a dependence switching copula more appropriately and realistically captures a dependence structure than a single copula regime our findings indicate that the lower tail dependence is much stronger in a bearish regime than in a bullish regime highlighting the importance of systematic risk spillovers during extreme downward movements furthermore the significant risk spillovers from energy to agricultural commodities are verified by measuring the conditional value at risk covar and delta covar finally some useful implications are summarized for investors portfolios and risk avoidance

international diversification a copula approach abstract the viability of international diversification involves balancing benefits and costs this balance hinges on the degree of asset dependence in light of theoretical research linking diversification and dependence we examine international diversification using two measures of dependence correlations and copulas we document several findings first dependence has increased over time second we find evidence of asymmetric dependence or downside risk in latin america but less in the g5 the results indicate very little downside risk in east asia third east asian and latin american returns exhibit some correlation complexity interestingly the regions with maximal dependence or worst diversification do not command large returns our results suggest international limits to diversification they are also consistent with a possible tradeoff between international diversification and systemic risk

downside and upside risk spillovers between exchange rates and stock prices abstract we examined downside and upside risk spillovers from exchange rates to stock prices and vice versa for a set of emerging economies we characterized the dependence structure between currency and stock returns using copulas and computed downside and upside value at risk and conditional value at risk we documented a positive relationship between stock prices and currency values in emerging economies with respect to the us dollar and the euro with downside and upside spillover risk effects transmitted both ways finally we also documented asymmetries in upside and downside risk spillovers and asymmetric differences in the size of risk spillovers when the domestic currency values against the us dollar and the euro our results consistent with flight to quality phenomena have implications for downside and upside risk management of international investor portfolios in emerging markets

efficiency in index options markets and trading in stock baskets abstract researchers have reported mispricing in index options markets this study further examines the efficiency of the s p 500 index options market by testing theoretical pricing relationships implied by no arbitrage conditions the effect of a traded stock basket standard and poor s depository receipts spdrs on the link between index and options markets is also examined we find that pricing efficiency within option markets improves but there is little evidence to support the hypothesis that a stock basket enhances arbitrage across markets when transactions costs and short sales constraints are included very few violations of inter market pricing relationships such as put call parity are reported however violations of within market pricing relationships such as the box spread remain frequent extensive analysis suggests that the results are robust

how do crude oil prices co move a copula approach abstract this paper examines the dependence structure between crude oil benchmark prices using copulas by considering several copula models with different conditional dependence structures and time varying dependence parameters we find evidence of significant symmetric upper and lower tail dependence between crude oil prices these findings suggest that crude oil prices are linked with the same intensity during bull and bear markets thus supporting the hypothesis that the oil market is one great pool in contrast with the hypothesis that states that the oil market is regionalized our findings on crude oil price co movements also have implications for risk management hedging strategies and asset pricing

a revisit to the dependence structure between the stock and foreign exchange markets a dependence switching copula approach abstract this paper develops a dependence switching copula model to examine dependence and tail dependence for four different market statuses namely rising stocks appreciating currency falling stocks depreciating currency rising stocks depreciating currency and falling stocks appreciating currency the model is then applied to daily stock returns and exchange rate changes for six major industrial countries over the 1990 2010 period the dependence and tail dependence among the above four market statuses are asymmetric for most countries in the negative correlation regime but symmetric in the positive correlation regime these results enrich the findings in the existing literature and suggest that analyzing cross market linkages within a time invariant copula framework may not be appropriate

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

reit industry liquidity valuation and ownership reactions to etf inceptions we examine the impact of real estate investment trust reit exchange traded fund etf inceptions on the valuation ownership structure and liquidity of the u s reit market we posit that the re