microstructure noise realized variance and optimal sampling a recent and extensive literature has pioneered the summing of squared observed intra daily returns realized variance to estimate the daily integrated variance of financial asset prices a traditional object of economic interest we show that in the presence of market microstructure noise realized variance does not identify the daily integrated variance of the frictionless equilibrium price however we demonstrate that the noise induced bias at very high sampling frequencies can be appropriately traded off with the variance reduction obtained by high frequency sampling and derive a mean squared error mse optimal sampling theory for the purpose of integrated variance estimation we show how our theory naturally leads to an identification procedure which allows us to recover the moments of the unobserved noise this procedure may be useful in other applications finally using the profits obtained by option traders on the basis of alternative variance forecasts as our economic metric we find that explicit optimization of realized variance s finite sample mse properties results in accurate forecasts and considerable economic gains copyright 2008 wiley blackwell

analytical evaluation of volatility forecasts estimation and forecasting for realistic continuous time stochastic volatility models is hampered by the lack of closed form expressions for the likelihood in response andersen bollerslev diebold and labys econometrica 71 2003 579 625 advocate forecasting integrated volatility via reduced form models for the realized volatility constructed by summing high frequency squared returns building on the eigenfunction stochastic volatility models we present analytical expressions for the forecast efficiency associated with this reduced form approach as a function of sampling frequency for popular models like garch multifactor affine and lognormal diffusions the reduced form procedures perform remarkably well relative to the optimal infeasible forecasts

variance risk premium dynamics the role of jumps using high frequency stock market data and synthetic variance swap rates this paper identifles and investigates the temporal variation in the market variance risk premium the variance risk is manifest in two salient features of flnancial returns stochastic volatility and jumps the pricing of these two separate components is analyzed in a general semiparametric framework the key empirical results imply that investors fears of future jumps are especially sensitive to recent jump activity and that their willingness to pay for protection against jumps increase signiflcantly immediately after the occurrence of jumps this in turn suggests that time varying risk aversion as previously documented in the literature is primarily driven by large or extreme market moves the dynamics of risk neutral jump intensity extracted from deep out of the money put options conflrms these flndings jel c51 c52 g12 g13

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

the output inflation tradeoff and central bank reform evidence from new zealand the 1989 reserve bank of new zealand act provides a natural experiment in which the effects of institutional change on economic relationships can be studied the act set price stability as the single objective of monetary policy and gave the bank great independence reforms of this nature may lead to a greater short run output inflation tradeoff by altering optimal stabilisation policy and wage indexation allowing for environments where learning about the new regime is assumed to be rapid as well as slow we find that a large rise in the new zealand tradeoff has occurre d since implementation of the act

a comparison of three institutions for monetary policy when central bankers have private objectives how do different institutional arrangements for the central bank perform when central bankers have private objectives and society objectives vary with time this paper evaluates three benchmark monetary institutions from a constitutional perspective i a contract with an inflation or monetary target announcement ii an inflation rule and iii the laissez faire policy i e the absence of any contractual arrangement at the stage of institutional choice there is uncertainty about both society s mean inflation target and the central banker s future inflation target a target announcement reveals the type of the central banker and solves the credibility vs flexibility trade off but it can not prevent that the central banker follows private objectives the announcement based contract is the optimal institution if i the initial uncertainty about the central banker s objectives is small and ii if unemployment is sufficiently high

high frequency volatility connectedness between the us crude oil market and china s agricultural commodity markets abstract this paper investigates the realised volatility connectedness of us crude oil futures and five china s agricultural commodity futures using connectedness measures and high frequency data time varying volatility connectedness characteristics are identified by combining a multivariate heteroscedastic autoregressive har model with the dcc garch model the results verify the existence of volatility spillover from the us crude oil market to china s agricultural commodity markets although the magnitude of this spillover is weak furthermore the realised volatility is decomposed into positive and negative components to identify the asymmetric effect of volatility connectedness the results show that market interdependence has obviously increased for negative volatility relative to positive volatility implying that volatility transmission has a leverage effect across markets

forecasting reit volatility with high frequency data a comparison of alternative methods abstractvolatility is a crucial input for many financial applications including asset allocation risk management and option pricing over the last two decades the use of high frequency data has greatly advanced the research on volatility modelling this article makes the first attempt in the real estate literature to employ intraday data for volatility forecasting we examine a wide range of commonly used methods and apply them to several major global reit markets our findings suggest that the group of reduced form methods deliver the most accurate one step ahead forecast for daily reit volatility they outperform their garch model based counterparts and two methods using low frequency data we also show that exploiting intraday information through garch does not necessarily yield incremental precision for forecasting reit volatility our results are relatively robust to the choice of realized measure of volatility and the length of evaluation period

inflation rules with consistent escape clauses abstract simple inflation targets may be supplemented with an escape clause to be invoked in case the economy is hit by a major supply shock in this paper consistent solutions to the flood and isard 1989 imf staff papers 36 612 632 escape clause model are derived in the spirit of lohmann 1990 american economic review 82 273 286 she shows that flood and isard s assumption of symmetric boundary values of shocks outside of which the zero inflation rule should be broken is inconsistent as long as the employment target differs from the natural rate however she does not actually solve the model obstfeld 1991 nber working paper no 3603 applies this framework to an exchange rate escape clause but is unable to solve his model given a triangular distribution of the supply shocks this paper shows how the model can be solved and the optimal escape clause derived assuming a uniform distribution numerical examples suggest that the optimal boundary values in the consistent model are highly asymmetric

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

roughing it up including jump components in the measurement modeling and forecasting of return volatility a rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from high frequency returns coupled with simple modeling procedures building on recent theoretical results in barndorff nielsen and shephard 2004a 2005 for related bi power variation measures the present paper provides a practical and robust framework for non parametrically measuring the jump component in asset return volatility in an application to the dm exchange rate the s p500 market index and the 30 year u s treasury bond yield we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process moreover many jumps appear directly associated with specific macroeconomic news announcements separating jump from non jump movements in a simple but sophisticated volatility forecasting model we find that almost all of the predictability in daily weekly and monthly return volatilities comes from the non jump component our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling forecasting and pricing the continuous and jump components of the total return variation process

semi parametric comparison of stochastic volatility models using realized measures this paper proposes a procedure to test for the correct specification of the functional form of the volatility process within the class of eigenfunction stochastic volatility models the procedure is based on the comparison of the moments of realized volatility measures with the corresponding ones of integrated volatility implied by the model under the null hypothesis we first provide primitive conditions on the measu rement error associated with the realized measure which allow to construct asymptotically valid specification tests then we establish regularity conditions under which the considered realized measures namely realized volatility bipower variation and modified subsampled realized volatility satisfy the given primitive assumptions finally we provide an empirical illustration based on thr ee stocks from the dow jones industrial average 2006 the review of economic studies limited

destabilizing effects of exchange rate escape clauses abstract this paper studies policy rules with escape clauses analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress while well designed escape clause rules can raise society s welfare in principle limited credibility makes it difficult to implement such rules in practice an ems type institution that imposes political costs on policymakers who realign may raise welfare but can also produce equilibria far inferior to an irrevocably fixed exchange rate switches between multiple equilibria may have the character of sudden speculative attacks

optimal inflation contracts and inflation targets with uncertain central bank preferences accountability through independence this paper examines some problems which arise when monetary policy is delegated to an independent central bank and where the central bank s preferences are unknown two key conclusions emerge from the paper first even with optimal targets or contracts central bank independence may not always be desirable because central banks may have distorted preferences relative to society second if the delegation solution is preferable and the independent central bank responds to information about supply shocks the central bank may be made more accountable by allowing it to set its own inflation targets i e by making it goal independent

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

a model of the federal reserve act under the international gold standard system abstract freeman am econom rev 86 1996a 1126 shows that an elastic money supply enhances the efficiency of monetary equilibrium by clearing default free debts at par value in the domestic credit market this research adds a foreign exchange market to freeman s model and extends his analysis into a two country model in which the arrival rates of agents are not equal between the two countries in this model an elastic money supply in the foreign exchange market to clear the exchange of fiat monies at gold standard parity accompanied by an elastic money supply in the domestic credit market could improve the efficiency of monetary equilibrium

a theory of volatility spreads this study formalizes the departure between risk neutral and physical index return volatilities termed volatility spreads theoretically the departure between risk neutral and physical index volatility is connected to the higher order physical return moments and the parameters of the pricing kernel process this theory predicts positive volatility spreads when investors are risk averse and when the physical index distribution is negatively skewed and leptokurtic our empirical evidence is supportive of the theoretical implications of risk aversion exposure to tail events and fatter left tails of the physical index distribution in markets where volatility is traded

does ecological economics have a future contradiction and reinvention in the age of climate change abstract this paper addresses the role of neoclassical methodologies in ecological economics and the contradictions these methodologies pose to the field s critical founding principles we first consider robert costanza s treatment of nicholas stern s global deal and then survey climate change related articles published in this journal over the past five years this survey reveals how mainstream neoclassical methodologies dominate discourse and do so by marginalizing more critical political economy analyses this situation imperils the field s founding vision of a no growth steady state it also fails to address the related growth dynamics of capitalism without such a critical treatment the field s formal embrace of methodological pluralism actually entails an ideological empiricism that renders ecological economics theoretically incoherent this situation undermines the field s historical promise as an alternative economic paradigm ecological economics now faces a problematic future its survival in a form faithful to its founding vision will require an explicit choice to address its internal contradictions and reinvent itself in ways relevant to our contemporary context without such a choice ecological economics will likely succumb to an implicit acceptance of the hegemony of mainstream economic methodologies and their pro growth imperatives

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

macroeconomic determinants of stock volatility and volatility premiums how does stock market volatility relate to the business cycle we develop and estimate a no arbitrage model and find that i the level and fluctuations of stock volatility are largely explained by business cycle factors and ii some unobserved factor contributes to nearly 20 to the overall variation in volatility although not to its ups and downs instead this volatility of volatility relates to the business cycle finally volatility risk premiums are strongly countercyclical even more than stock volatility and partially explain the large swings of the vix index during the 2007 2009 subprime crisis which our model captures in out of sample experiments

using daily range data to calibrate volatility diffusions and extract the forward integrated variance a common model for security price dynamics is the continuous time stochastic volatility model for this model hull and white 1987 show that the price of a derivative claim is the conditional expectation of the black scholes price with the forward integrated variance replacing the black scholes variance implementing the hull and white characteriza tion requires both estimates of the price dynamics and the conditional distribution of the forward integrated variance given observed variables using daily data on close to close price movement and the daily range we find that standard models do not fit the data very well and that a more general three factor model does better as it mimics the long memory feature of financial volatility we develop techniques for estimating the conditional distribution of the forward integrated variance given observed variables i introduction

understanding the disinflations in australia canada and new zealand using evidence from smooth transition analysis abstract this paper investigates the disinflation experiences of three countries australia canada and new zealand unlike previous approaches which have sought to use institutional data to pre determine the causes speed and duration of the transitions to low inflation regimes this paper allows price data itself to determine the speed and timing of the reforms using smooth transition analysis the results show that the process of transition is related to two factors central bank independence and the general slowdown in economic activity which occurred during the early 1990s in all oecd countries other reforms to the labor market and fiscal policy were less influential

stock market volatility and business cycle evidence from linear and nonlinear causality tests this paper investigates the relationship between stock market volatility and the business cycle in four major economies namely the us canada japan and the uk we employ both linear and nonlinear bivariate causality tests and we further conduct a multivariate analysis to explore possible spillover effects across countries our results suggest that there is a bidirectional causal relationship between stock market volatility and the business cycle within each country and additionally reveal that the recent financial crisis plays an important role in this context finally we identify a significant impact of the us on the remaining markets

a theoretical comparison between integrated and realized volatility in this paper we provide both qualitative and quantitative measures of the precision of measuring integrated volatility by realized volatility for a fixed frequency of observation we start by characterizing for a general diffusion the difference between realized and integrated volatility for a given frequency of observation then we compute the mean and variance of this noise and the correlation between the noise and the integrated volatility in the eigenfunction stochastic volatility model of meddahi 2001a this model has as special cases log normal affine and garch diffusion models using previous empirical results we show that the noise is substantial compared with the unconditional mean and variance of integrated volatility even if one employs five minute returns we also propose a simple approach to capture the information about integrated volatility contained in the returns through the leverage effect we show that in practice the leverage effect does not matter copyright 2002 john wiley sons ltd

forecasting realized volatility with linear and nonlinear univariate models in this paper we consider a nonlinear model based on neural networks as well as linear models to forecast the daily volatility of the s p 500 and ftse 100 futures as a proxy for daily volatility we consider a consistent and unbiased estimator of the integrated volatility that is computed from high frequency intraday returns we also consider a simple algorithm based on bagging bootstrap aggregation in order to specify the models analysed in this paper

interest rate volatility the yield curve and the macroeconomy abstract this paper provides theory and evidence that a low dimensional term structure model can simultaneously price bonds and related options it shows that a component of volatility risk largely unrelated to the shape of the yield curve is a determinant of expected excess returns for holding long maturity bonds it also finds evidence for this return relationship both in the model and directly in the data through regression analysis the paper also identifies a link between corporate earnings performance and interest rate volatility providing a channel driving interest rate volatility the structure of risk in the model that gives rise to these features of volatility is distinct from that inherent in recent models with unspanned stochastic volatility

a conditional extreme value volatility estimator based on high frequency returns abstract this paper introduces a conditional extreme value volatility estimator evt based on high frequency returns the relative performance of the evt is compared with the discrete time garch and implied volatility models for 1 day and 20 day ahead forecasts of realized volatility this is also a first attempt towards detecting any time series variation in extreme value distributions using high frequency intraday data the information content of evt is examined in the context of forecasting sp 2 vix generally yields a less accurate characterization of realized volatility than evt and garch models these results have implications for financial risk management and are thus relevant to both regulators and practitioners

central banking as a political principal agent problem i introduction conventional wisdom holds that during election periods political leaders have incentives to misuse policy instruments to enhance their chances of reelection rogoff and sibert 1988 construct a rational political economy model of monetary policy based on this theme 1 the results of their model can be interpreted in the following way 2 society elects a leader every other period whose competence affects the level of output in the economy and private agents will tend to vote for the incumbent if the level of output is expected to be higher than that which can be provided by an unknown challenger voters have imperfect information regarding the politician s true impact on output and exogenous shocks to output and consequently cannot disentangle the effects of one from the other in an election period this asymmetry of information gives the incumbent an incentive to expand output through the use of inflationary monetary policy in order to appear more competent than he really is however rational voters are aware of this incentive to inflate and adjust their expectations such that in equilibrium no gain in output occurs and the economy suffers from excessive inflation an implication of the rogoff sibert model is that unless a society does away with elections as a way to choose policymakers excessive inflation and a political inflation cycle will be an unavoidable cost of democracy however societies can try and have tried to avoid these ill effects by taking the power of money creation away from the elected officials and giving it to an appointed independent central banker who will presumably pursue the public good but can this approach actually work the problem with this proposal is that the central bankers well being in many respects reappointment post central bank employment opportunities avoidance of public criticism etc often hinges on pleasing their political benefactors giving the central bankers incentives to act in the interest of elected officials 3 as a result the central banker could pursue objectives different from society s and may actually function as a veil for the elected policymaker in the real world this veil is not complete but partial and hence we can characterize the relationship between the monetary authority and society as a principal agent problem the advantage of delegating power to an appointed central banker and then erecting appropriate institutions is that the inflation problems may be resolved without abandoning the electoral process in this paper we develop a rational political business cycle model that starts from the foundations laid down by rogoff and sibert we depart from their model by having monetary policy delegated to a central banker who is appointed by the elected leaden the concern about reappointment is what motivates the agency problem the central banker would like to be reappointed and this desire leads her to partially accommodate the wishes of the current administration which in turn may not coincide with the desires of the electorate we then analyze the problem faced by a central banker who is concerned about her own selfinterest as well as social well being it is this feature that turns the setting of monetary policy into a political principal agent problem the contributions of our approach to modelling the agency problem of central banking are 1 it explicitly incorporates reappointment concerns into the decision process of the central banker which heretofore has not been done in the literature and 2 we explicitly model the source of the agency problem unlike previous research that simply assumes an agency problem exists our key results are as follows in equilibrium the pursuit of her own self interest leads the central banker to create a socially inefficient inflation bias while rogoff and sibert also obtain this result our explicit functionalform model allows us to analyze this bias in more detail and tie it directly to the strength of the relationship between the central banker and the current administration

realized garch a joint model for returns and realized measures of volatility summary we introduce a new framework realized garch for the joint modeling of returns and realized measures of volatility a key feature is a measurement equation that relates the realized measure to the conditional variance of returns the measurement equation facilitates a simple modeling of the dependence between returns and future volatility realized garch models with a linear or log linear specification have many attractive features they are parsimonious simple to estimate and imply an arma structure for the conditional variance and the realized measure an empirical application with dow jones industrial average stocks and an exchange traded index fund shows that a simple realized garch structure leads to substantial improvements in the empirical fit over standard garch models that only use daily returns copyright 2011 john wiley sons ltd

option prices implied price processes and stochastic volatility this paper characterizes all continuous price processes that are consistent with current option prices this extends derman and kani 1994 dupire 1994 1997 and rubinstein 1994 who only consider processes with deterministic volatility our characterization implies a volatility forecast that does not require a specific model only current option prices we show how arbitrary volatility processes can be adjusted to fit current option prices exactly just as interest rate processes can be adjusted to fit bond prices exactly the procedure works with many volatility models is fast to calibrate and can price exotic options efficiently using familiar lattice techniques

optimal central banker contracts and common agency this paper considers the contracting approach to centralbanking in a simple common agency model we suggest thatcentral banker contracts that do not consider the possibilityof more than one principal existing are incomplete contracts such incomplete contracts can be a poor form ofmonetary policy delegation under common agency we develop amodel with two principals society government and ageneric interest group whose objective conflicts withsociety s ex ante preferences by incorporating an inflationarybias we determine when the government offered orinterest group offered contract dominates the central banker sdecision the results largely depend on whether theinterest group offered contract is written in terms of outputor inflation

forecasting realized volatility a bayesian model averaging approach summary how to measure and model volatility is an important issue in finance recent research uses high frequency intraday data to construct ex post measures of daily volatility this paper uses a bayesian modelaveraging approach to forecast realized volatility candidate models include autoregressive and heterogeneous autoregressive specifications based on the logarithm of realized volatility realized power variation realized bipower variation a jump and an asymmetric term applied to equity and exchange rate volatility over several forecast horizons bayesian model averaging provides very competitive density forecasts and modest improvements in point forecasts compared to benchmark models we discuss the reasons for this including the importance of using realized power variation as a predictor bayesian model averaging provides further improvements to density forecasts when we move away from linear models and average over specifications that allow for garch effects in the innovations to log volatility copyright 2009 john wiley sons ltd

rate fears gauges and the dynamics of fixed income and equity volatilities abstract while cboe s vix index is widely acknowledged as a broad based investor fear gauge for its strong inverse relationship with major equity indexes one cannot necessarily expect it to translate to the level of future turbulence or investor risk aversion in fixed income markets indeed expected volatilities in equity and interest rate markets as measured respectively by cboe s vix and their newly launched swap rate volatility index the srvx exhibit significantly distinct behavior the two indexes react to different events and risk factors thereby providing investors with complementary diversification hedging and risk taking tools

properties of realized variance under alternative sampling schemes this article investigates the statistical properties of the realized variance estimator in the presence of market microstructure noise different from the existing literature the analysis relies on a pure jump process for high frequency security prices and explicitly distinguishes among alternative sampling schemes including calendar time sampling business time sampling and transaction time sampling the main finding in this article is that transaction time sampling is generally superior to the common practice of calendar time sampling in that it leads to a lower mean squared error mse of the realized variance the benefits of sampling in transaction time are particularly pronounced when the trade intensity pattern is volatile based on ibm transaction data over the period 2000 2004 the empirical analysis finds an average optimal sampling frequency of about 3 minutes with a steady downward trend and significant day to day variation related to market liquidity and a consistent reduction in mse of th

tails fears and risk premia we show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new investor fears index the index reveals large time varying compensation for fears of disasters our empirical investigations involve new extreme value theory approximations and high frequency intraday data for estimating the expected jump tails under the statistical probability measure and short maturity out of the money options and new model free implied variation measures for estimating the corresponding risk neutral expectations

estimating quadratic variation using realized variance this paper looks at some recent work on estimating quadratic variation using realised variance rv that is sums of m squared returns this econometrics has been motivated by the advent of the common availability of high frequency financial return data when the underlying process is a semimartingale we recall the fundamental result that rv is a consistent as m estimator of quadratic variation qv we express concern that without additional assumptions it seems difficult to give any measure of uncertainty of the rv in this context the position dramatically changes when we work with a rather general sv model which is a special case of the semimartingale model then qv is integrated variance and we can derive the asymptotic distribution of the rv and its rate of convergence these results do not require us to specify a model for either the drift or volatility functions although we have to impose some weak regularity assumptions we illustrate the use of the limit theory on some exchange rate data and some stock data we show that even with large values of m the rv is sometimes a quite noisy estimator of integrated variance

monetary politics and unemployment persistence abstract this paper develops a positive model of monetary policy that allows for persistent unemployment and electoral uncertainty the common credibility problem associated with low inflation monetary policy results in both a more severe inflation bias and a stabilization bias however a simple state contingent performance contract eliminates both biases monetary policy is also subject to two different strategic political considerations it is used to influence future policy decisions as well as to increase the incumbent party s probability of re election this results in a political business cycle which however is fundamentally different for left wing and right wing governments

assessing market microstructure effects via realized volatility measures with an application to the dow jones industrial average stocks transaction prices of financial assets are contaminated by market microstructure effects this is particularly relevant when estimating volatility using high frequency data in this article we assess statistically the effect of microstructure noise on volatility estimators and test the hypothesis that its variance is independent of the sampling frequency we provide evidence based on the dow jones industrial average stocks we find that noise has a statistically significant effect on volatility estimators at frequencies of 2 3 min or higher the independently and identically distributed specification with constant variance seems to be a plausible model for microstructure noise except for ultra high frequencies

political parties and monetary commitments we argue that political parties will choose monetary institutions in order to help them win elections and retain office increased levels of economic openness in the industrial democracies have complicated the pursuit of office by altering the policy preferences of constituents and decreasing the ability of cabinet ministers to deliver promised economic outcomes we contend that monetary commitments can help political parties manage diverse constituent interests restore policy effectiveness and ultimately maintain their position in office therefore we expect that fixed exchange rates and central bank independence can improve cabinet durability especially under conditions of economic openness in the first section we discuss how fixed exchange rates and central bank independence can insulate cabinets from the political shocks of increased economic openness to determine the political value of these commitments we then test the effect of exchange rate commitments and central bank independence on cabinet durability in the second section in the third section we use the results of our statistical models to generate expected cabinet durability for the countries in our sample under alternative institutional configurations by comparing the expected durabilities we show that most monetary reforms have helped or at least not hurt expected cabinet durability

does the option market produce superior forecasts of noise corrected volatility measures this paper presents a comprehensive empirical evaluation of option implied and returns based forecasts of volatility in which recent developments related to the impact on measured volatility of market microstructure noise are taken into account the paper also assesses the robustness of the performance of the option implied forecasts to the way in which those forecasts are extracted from the option market using a test for superior predictive ability model free implied volatility which aggregates information across the volatility smile and at the money implied volatility which ignores such information are both tested as benchmark forecasts the forecasting assessment is conducted using intraday data for three dow jones industrial average djia stocks and the s p500 index over the 1996 2006 period with future volatility proxied by a range of alternative noise corrected realized measures the results provide compelling evidence against the model free forecast with its poor performance linked to both the bias and excess variability that it exhibits as a forecast of actual volatility the positive bias in particular is consistent with the option market factoring in a substantial premium for volatility risk in contrast implied volatility constructed from liquid at the money options is given strong support as a forecast of volatility at least for the djia stocks neither benchmark is supported for the s p500 index importantly the qualitative results are robust to the measure used to proxy future volatility although there is some evidence to suggest that any option implied forecast may perform less well in forecasting the measure that excludes jump information namely bi power variation

the variance risk premium and fundamental uncertainty we propose a new measure of the expected variance risk premium that is based on a forecast of the conditional variance from a garch midas model we find that the new measure has strong predictive ability for future u s aggregate stock market returns and rationalize this result by showing that the new measure effectively isolates fundamental uncertainty as the factor that drives the variance risk premium

hidden linkages between resources and economy a beyond gdp approach using alternative welfare indicators taking gdp as the standard economic indicator for economic welfare recent resources economy studies indicate the dematerialization of the economy the so called decoupling effect this conclusion seems to alleviate concerns over resource scarcity and limits to growth and feeds optimism for green growth and sustainability prospects however the validity of gdp as the sole and unambiguous measure of the ultimate outcome of the economy has been severely disputed there is nowadays increasing interest in broader welfare measurements that capture more aspects of economic output and hence constitute better approximations of well being the present paper provides an overview of the above discussion and sets out to explore the relevance of three alternative welfare indicators the human development index hdi the index of sustainable economic welfare isew and the genuine progress indicator gpi as a basis for evaluating the dependency of welfare and its major engine the economy on natural resources increasing welfare appears to require a disproportionate use of resources strong and increasing dependency on resources at the global level and in giant countries such as china and india may have serious implications for current sustainability policies and the united nations sustainable development goals

is new zealand s reserve bank act of 1989 an optimal central bank contract this paper evaluates the reserve bank of new zealand act of 1989 from a principal agent perspective arguing that the act represents a dismissal rule the optimal dismissal rule requires that the central banker be dismissed whenever inflation exceeds a critical level that depends on aggregate supply disturbances and measurement error in the inflation index this is essentially the structure established by the act the scope for renegotiating the target rate however creates an incentive for the government to set the critical rate too high consequently the inflation bias of discretion is reduced but not completely eliminated copyright 1995 by ohio state university press

eco localism and sustainability abstract economic sustainability is best secured by the creation of local or regional self reliant community economies this is the central argument of eco local economic theory drawing on the experience of local currencies community corporations regional food economies and other locally oriented efforts eco local theory presents a new analysis of the economy of place it focuses on locally symbiotic capital positive externalities of self reliance and negative externalities of long distance trade and its specific concepts and analyses of the economy efficiency and economies of scale and consumption and welfare given its specific values and assumptions it is an economic theory of the social economy that is compatible with but distinct from ecological economics

correlating localisation and sustainability and exploring the causality of the relationship abstract this article explores the idea that localisation may be an important sustainability strategy to reduce the harmful socio ecological effects of economic globalisation the processes of selecting sustainability indices with which to correlate localisation indices and incorporating ecological footprint results to convert bhutan s gross national happiness index to a sustainability index that includes environmental impact measures are described correlation analysis was then used to explore whether the most sustainable places are also the most localised at regional and national levels a strongly positive regional result for bhutan indicates that as localisation increases in the districts there so does sustainability at the national level global localisation and sustainability correlations were not significant however due to the inability of national level measurement to capture important sustainability dimensions this result is unreliable as localisation and sustainability are ideally measured in the same way everywhere according to global principles with cultural adjustments the bhutanese result adds weight to suggestions that localisation be explored to inform sustainability planning as an important alternative to current unsuccessful sustainability strategies based on economic globalisation interviews carried out to explore the causality of the positive correlation results in bhutan confirmed that localisation is an important aspect of sustainability planning there

checks and balances and the supply of central bank independence abstract the paper analyzes the institutional conditions under which policymakers can credibly commit to an independent central bank and thereby mitigate the well known time consistency problem in monetary policy it is shown theoretically that granting independence via a statute is only credible for legislative systems with at least two heterogeneous decision making bodies which both have veto rights for example bicameral systems this thesis is supported by empirical evidence the legal independence of central banks is significantly higher in those oecd countries whose legislative processes are characterized by extensive checks and balances furthermore the negative relation between legal independence and inflation is larger in countries with checks and balances than in countries without checks and balances

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

forecasting the good and bad uncertainties of crude oil prices using a har framework abstract good or bad uncertainty is the volatility that is associated with positive or negative innovations to asset prices this paper proposes new heterogeneous autoregressive type har type models to forecast the good and bad uncertainties of crude oil prices in this paper we investigate the effects of lagged bad and good uncertainties daily positive and negative signed jump variations and leverages on predicting good and bad uncertainties by in sample and out of sample analysis the in sample results show that bad and good uncertainties have long memory property and the predictability of long term good and bad uncertainties is stronger than that of short and mid term good and bad uncertainties the out of sample results indicate that lagged bad or good uncertainties daily positive signed jump variation and daily negative signed jump variation contain incremental out of sample information for forecasting good or bad uncertainties and in most cases lagged leverages also play indispensable roles in forecasting the good and bad uncertainties in the crude oil market moreover the results of out of sample analysis remain robust across using the other estimation window other har type models and the other sample

realized volatility forecasting in the presence of time varying noise observed high frequency financial prices can be considered as having two components a true price and a market microstructure noise perturbation it is an empirical regularity coherent with classical market microstructure theories of price determination that the second moment of market microstructure noise is time varying we study the optimal from a finite sample forecast mean squared error mse standpoint frequency selection for realized variance in linear variance forecasting models with time varying market microstructure noise we show that the resulting sampling frequencies are generally considerably lower than those that would be optimally chosen when time variation in the second moment of the noise is unaccounted for these optimal lower frequencies have the potential to translate into considerable out of sample mse gains when forecasting using high frequency variance estimates we recommend treating the relevant frequency as a parameter and evaluating it jointly with the parameters of the f

inflation risk premia and the expectations hypothesis abstract we study the properties of the nominal and real risk premia of the term structure of interest rates we develop and solve the bond pricing implications of a structural monetary version of a real business cycle model with taxes and endogenous monetary policy we show the relation of this model with the class of essentially affine models that incorporate an endogenous state dependent market price of risk we characterize and estimate the inflation risk premium and find that over the last 40 years the ten year inflation risk premium has been has averaged 70 basis points it is time varying ranging from 20 to 140 basis points over the business cycle and its term structure is sharply upward sloping the inflation risk premium explains 23 42 of the time variation in the five ten year forward risk premium and it plays an important role in help explain deviations from the expectations hypothesis of interest rates

moment based estimation of stochastic volatility abstract this paper makes use of the distributional information contained in high frequency data to test for the specification of the functional form of the volatility process within the class of stochastic volatility models it s calculus is implemented in order to obtain the first and second conditional moment of the driving stochastic differential equation for the volatility process these analytical expressions are augmented by their lag and lag squared and are used to form the corresponding gmm estimator the base case stochastic volatility model is extended to allow for the leverage effect and jumps in returns empirical estimation confirms the presence of fast mean reversion in volatility and jumps in returns for the 5 min s p 500 stock market index further estimation results also seem to indicate the presence of jumps in the volatility process that are correlated to the jumps in returns

a further critique of growth economics is aggregate physical growth still economic as it was in the empty world or has it become uneconomic as we have moved into the full world era first i discuss why this critical question has been ignored by mainstream economists and policy makers second i consider 11 fallacies or anomalies that confuse reasoning about economic growth and undercut the current policy presumption in its favor

is it possible that an independent central bank is impossible the case of the australian notes issue board 1920 1924 the history of the australian notes issue board over the period 1920 1924 is presented it is shown that the board was created as a genuinely independent monetary authority but was soon abolished as its policies antagonised interests upon which the government depended the episode illustrates the thesis that the possibility of a genuinely independent monetary authority is problematic

linking daly s proposition to policymaking for sustainable development indicators and pathways abstract the statement that in the full world increasing the ultimate efficiency expressed as service throughput is the necessary condition for humanity to achieve high levels of well being within ecological limits is honoured as daly s proposition in this paper the purpose of this paper is to make daly s proposition effective guidance for policymaking related to sustainable development for this aim this paper puts forward the indicator ecological well being performance which is composed of the human development index and the ecological footprint to measure the ultimate efficiency furthermore by means of matrix analysis and factor decomposition analysis the respective pathways for countries at different stages of development to make the sustainable development transition were discussed the g20 countries were taken as the cases to conduct the research the empirical results show that improvements in well being and increases in throughput level are not necessarily positively related the relationship between the two depends on how countries control throughput levels and improve the ecological well being performance which also explains different performances on the sustainable development transition in a simple way this contribution provides new methods and criteria to track and evaluate national performance on sustainable development by referring to daly s original theories

open mouth operations abstract this paper explains how central bank statements rather than open market operations can be used to implement monetary policy in the extreme policy instruments can be held constant and yet interest rates will evolve along the path desired by the central bank we show how the recent implementation of monetary policy in new zealand works in this way using announcement data from new zealand we find that open mouth operations lead to large changes in interest rates across all maturities and these changes cannot be explained by open market operations implications are drawn for monetary policy in other jurisdictions

how relevant is volatility forecasting for financial risk management it depends if volatility fluctuates in a forecastable way volatility forecasts are useful for risk management hence the interest in volatility forecastability in the risk management literature volatility forecastability however varies with horizon and different horizons are relevant in different applications moreover existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model and the results can vary not only with the horizon but also with the assumed model to address this problem we develop a model free procedure for assessing volatility forecastability across horizons perhaps surprisingly we find that volatility forecastability decays quickly with horizon volatility forecastability although clearly of relevance for risk management at the short horizons relevant for say trading desk management may be much less important at longer horizons

the statistical and economic role of jumps in continuous time interest rate models this paper analyzes the role of jumps in continuous time short rate models i first develop a test to detect jump induced misspecification and using treasury bill rates find evidence for the presence of jumps second i specify and estimate a nonparametric jump diffusion model results indicate that jumps play an important statistical role estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps finally i investigate the pricing implications of jumps jumps generally have a minor impact on yields but they are important for pricing interest rate options

accountability transparency and inflation targeting inflation targeting regimes define a performance measure for the central bank a regime that places a large small weight on achieving the target is analogous to a high low powered incentive scheme high powered incentive structures promote accountability but may distort stabilization policy the optimal power under inflation targeting is derived under perfect and imperfect information the fundamental trade off between accountability and stabilization depends on the degree of transparency defined as the ability to monitor the central bank s performance multiplicative uncertainty increases the optimal weight to place on achieving an inflation target