the forecasting ability of correlations implied in foreign exchange options abstract this paper evaluates the forecasting accuracy of correlations derived from implied volatilities in dollar mark dollar yen and mark yen options from january 1989 to may 1995 as a forecast of realized correlation between the dollar mark and dollar yen implied correlation is compared against three alternative forecasts based on time series data historical correlation riskmetrics exponentially weighted moving average correlation and correlation estimated using a bivariate garch 1 1 model at the 1 month and 3 month forecast horizons we find that implied correlation outperforms often significantly these alternative forecasts in combinations implied correlation always incrementally improves the performance of other forecasts but not the converse in certain cases historically based forecasts contribute no incremental information to implied forecasts the superiority of the implied correlation forecast holds even when forecast errors are weighted by realized variances reflecting correlation s contribution to the dollar variance of a multicurrency portfolio

the term structure of volatility implied by foreign exchange options this paper illustrates regression and kalman filtering methods for estimating the time varying term structure of volatility expectations revealed by options prices short and long term expectations are estimated for four currencies using daily phlx options prices from 1985 to 1989 throughout this period there were important differences between shortand long term expectations the slope of the term structure changed frequently and there were significant variations in long term volatility expectations the expectation estimates can be used to value otc options to improve hedging strategies and to test the hypothesis that the options market overreacts

how important is the term structure in implied volatility surface modeling evidence from foreign exchange options we claim that previously proposed parametric specifications that linearly approximate the term structure of the implied volatility surface ivs in option prices fail to capture important information regarding the expectations of market participants this paper proposes a parametric specification for describing the ivs that allows flexible modeling of the term structure through a nelson and siegel 1987 factorization recently proposed by diebold and li 2006 in the context of yield curve modeling the specification is tested on implied volatilities from the over the counter foreign exchange options market where contracts with long expiries are actively traded and thus the term structure dimension of the surface should be very important we first show that the proposed volatility specification can consistently and remarkably improve our ability to describe the surface on any given day we then establish the economic relevance of the incremental information captured by our proposed specification by showing that it can produce more accurate forecasts of implied volatility that can support long term profitable trading strategies in the absence of transaction costs

exporting europe s trade policy there are three well known observations about the current regional trade policy of europe the first one is the central role played by the european union in the worldwide spreading of regional agreements the second is the new policy of signing bilateral deep regional trade agreements the third is the growing demand for harmonisation of international and domestic trade regulations we show that the combination of these three trends results in europe increasingly weighing on the policy decisions of its trade partners in particular with regard to their trade policies the european hegemonic influence which can be viewed as europe exporting its policy models is extending to all partners in preferential trade agreements not only the accession candidates it has two main broad manifestations a prescriptive approach to push bilateral partners into regional agreements among themselves and a tendency to diffuse european rules in its bilateral agreements with its partners we review the various provisions of the agreements through which this influence operates although this policy can be viewed as desirable in some instances it also generates actual and potential future costs for developing countries as well as posing non trivial dangers to the process of multilateral liberalisation and to the building of appropriate policies for the partner countries

missed opportunities the wto trade policy review for the east african community the east african community eac comprising kenya tanzania and uganda came into force on 7 july 2000 with a common external tariff cet established in january 2005 this trade policy review tpr of the eac is timely as all three countries had implemented significant trade liberalisation since the late 1980s while the cet represented an asymmetric change kenya and tanzania essentially reduced tariffs whereas uganda increased tariffs the tpr provides considerable information on the cet and on trade and related policies in each of the member countries however the eac and the tpr missed a number of opportunities the eac included no coordinated export promotion or investment provisions while the tpr says little on the potential for intra regional trade and nor does it address the position of the eac in the economic partnership agreements epas being negotiated with the eu this review concentrates on these omissions to explore the implications of the eac for developments in trade policy in the region

poverty comparisons over time and across countries in africa abstract we use demographic and health surveys dhs to compare poverty at two or more points in time within and between african countries our welfare measure is an index resulting from a factor analysis of various household characteristics durables and household heads education an advantage of this measure is that for intertemporal and intraregional comparisons we need not rely on suspect price deflators and currency conversion factors the wide availability and similarity of questionnaires of the dhs facilitate comparisons over both time and countries our results generally show declines in poverty during the previous decade largely due to improvements in rural areas

the volatility risk premium embedded in currency options this study employs a non parametric approach to investigate the volatility risk premium in the over the counter currency option market using a large database of daily delta neutral straddle quotes in four major currencies the british pound the euro the japanese yen and the swiss franc we find that volatility risk is priced in all four currencies across different option maturities we find that the volatility risk premium is negative with the premium decreasing in maturity finally we also find evidence that jump risk may be priced in the currency option market

the informational content of implied volatility implied volatility is widely believed to be informationally superior to historical volatility because it is the markets forecast of future volatility but for s p 100 index options the most actively traded contract in the united states we find implied volatility in aggregate and across subsamples separated by maturity and strike price implied volatility has virtually no correlation with future volatility and it does not incorporate the information contained in recent observed volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

using option prices to estimate realignment probabilities in the european monetary system the case of sterling mark abstract this paper describes a procedure for estimating the market s perceived probability distribution of future exchange rates from the prices of risk reversals strangles and other currency options and uses the procedure to estimate the risk neutral ex ante probability of a realignment of the pound sterling the procedure for estimating the realignment probabilities relies on the jump diffusion model of exchange rate behavior and the resulting option pricing formula by fitting this model to market option price data i retrieve the unobserved parameters of the jump diffusion process i then use these parameter estimates to estimate the ex ante probability distribution of exchange rates and thus the realignment probabilities

arbitrage based tests of target zone credibility evidence from erm cross rate options this paper introduces two arbitrage based tests of target zone credibility using a new data source exchange rate mechanism cross rate options using daily option prices from september 1991 to august 1994 the authors assess the credibility of the pound mark and mark lira target zones that collapsed in september 1992 and the ongoing mark french franc target zone these tests are based on restrictions that must apply to all option prices within a credible target zone and are free from specification error and estimation error the authors also identify a minimum intensity of realignment an expression indicating the probability weighted average realignment size copyright 1996 by american economic association

wealth distribution in cuba 2006 2014 a first assessment using microdata recently a trend towards increasing inequality has been detected in both developed and developing countries most of these studies have been focusing on formal monetary variables since capitalism is a socioeconomic system where monetary relations play a paramount role however the distribution of non monetary assets is also very important especially so in less developed countries this paper applies a pca methodology to analyse the distribution of non monetary wealth in cuba a socialist country where the role of monetary relations is relatively minor utilizing the mics unicef microdata the paper provides for the first time an estimation of wealth distribution for three years 2006 2011 2014 by area and region the main results show a non monotonic wealth inequality reduction the initial worsening 2006 11 is more than counterbalanced by a recent improvement 2011 14

modelling priority patterns in asset acquisition the case of smallholder farmers in three rural districts in uganda poor smallholder farmers in uganda live at or below subsistence level they are vulnerable to multiple risks and insecurities and have limited access to capital markets in this article we propose a model to estimate household priority patterns in asset acquisition using cross section data the model is applied to a field survey consisting of 938 farm households from three districts the model predicts the distribution of asset ownership conditional on the type of assets owned based on the established priority patterns the article proposes a low cost regional poverty monitoring instrument using only asset type data

economic partnership agreements between sub saharan africa and the eu a development perspective this paper draws on hinkle and schiff 2003 it analyses the planned economic partnership agreements epas between the eu and sub saharan africa ssa from a development perspective it does not take a position on whether ssa should enter into epas with the eu rather it starts from the notion that the process of forming epas is unlikely to be reversed and examines the conditions that will maximise ssa s benefits from the epas if this notion is correct then the analysis presented in the paper applies on the other hand pascal lamy the eu trade commissioner made a proposal at the may 2004 g 90 summit in dakar that might lead to a change in the epa process he proposed that the g 90 a group consisting of acp and non acp ldc countries should not have to make concessions at the wto doha round of multilateral trade negotiations i e he proposed a free round for the g 90 this proposal opens the door to the possibility that the same might apply to the acp countries in the eu acp negotiations and that the epa process might be reversed the paper considers the key issues raised by the planned epas their relationship to the wto s doha round and the eu s everything but arms initiative the changes needed to make the epas internally consistent the domestic reforms in ssa that would need to accompany trade liberalisation in both goods and services and the potential effects of the epas on regional integration in ssa the epas will pose a number of policy challenges for ssa countries including restructuring of indirect tax systems reduction of mfn tariffs liberalisation of service imports on an mfn basis and related regulatory reforms in the services sector and liberalisation of trade in both goods and services within the regional trading blocs in ssa the paper also finds that the epas provide an opportunity to accelerate regional and global trade integration in ssa to realise the potential development benefits of the planned epas two steps are essential first the eu must as it has stated truly treat the epas as instruments of development subordinating its commercial interests in the agreements to the development needs of ssa second the ssa countries need to implement a number of epa related trade policy reforms however the latter is far from certain given the lack of reform momentum in ssa

do different types of assets have differential effects on child education evidence from tanzania to assess the conventional view that assets uniformly improve childhood development through wealth effects this paper tests whether different types of assets have different effects on child education the analysis indicates that household durables and housing quality have the expected positive effects but agricultural assets have adverse effects on highest grade completed and no effects on exam performance extending the standard agricultural household model by explicitly including child labor the study uses three waves of panel data from tanzania to estimate the effects of household assets on child education the analysis corrects for the endogeneity of assets and uses a hausman taylor instrumental variable panel data estimator to identify the effects of time invariant observables and more efficiently control for time invariant unobservables the negative effect of agricultural assets is more pronounced among rural children and children from farming households presumably due to the higher opportunity cost of their schooling

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

using an asset index to assess trends in poverty in seven sub saharan african countries summary using comparable nationally representative surveys and extending the work of sahn d e stifel d c 2000 poverty comparisons over time and across countries in africa world development 28 12 2123 2155 an asset index is used to investigate changes in poverty in seven african countries poverty declined in five of the seven countries improvements in the asset index are driven by progress in the accumulation of private assets while access to public services has deteriorated however the method has some shortcomings assets are slow changing and discrete the index therefore may not capture changes in well being accurately the poor discrimination ability of the index at the lower end of the scale also makes it an inappropriate tool for studying ultra poverty

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

recovering an asset s implied pdf from option prices an application to crude oil during the gulf crisis we develop a general method for estimating the implied martingale equivalent probability density function pdf for futures prices from american options prices the early exercise feature of american options precludes expressing the price of the option in terms of the pdf there exist tight bounds for the price of american options in terms of the pdf we demonstrate how these bounds together with observed option prices can be used to estimate the parameters of the pdf we estimate the distribution for crude oil during the persian gulf crisis and find the distribution differs significantly from that recovered using standard techniques

predictable dynamics in implied volatility surfaces from otc currency options recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices such as those prescribed by general equilibrium models using an extensive data set from the over the counter options market we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates we proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out of sample forecasts of the systematic component of the surface at short horizons profitable delta hedged positions can be set up based on these forecasts however profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought

a utility based comparison of some models of exchange rate volatility abstract when estimates of variances are used to make asset allocation decisions underestimates of population variances lead to lower expected utility than equivalent overestimates a utility based criterion is asymmetric unlike standard criteria such as mean squared error to illustrate how to estimate a utility based criterion we use five bilateral weekly dollar exchange rates 1973 1989 and the corresponding pair of eurodeposit rates of homoskedastic garch autoregressive and non parametric models for the conditional variance of each exchange rate garch models tend to produce the highest utility on average a mean squared error criterion also favors garch but not as sharply

measuring vulnerability to asset poverty in sub saharan africa summary this paper presents a methodology to measure vulnerability to asset poverty using repeated cross section data age cohort decomposition techniques focusing on second order moments can be used to identify and estimate the variance of shocks on assets and therefore the probability of being poor in the future estimates from the ghana living standard surveys show that expected asset poverty is a reliable proxy for expected consumption poverty applying the methodology to eight demographic health surveys countries households in rural areas are found to be unambiguously more vulnerable to poverty than those in urban areas

the trade and fiscal impact of eu acp economic partnership agreements on west african countries abstract the european union is currently negotiating free trade agreements called economic partnership agreements epas with african countries as part of the cotonou agreement between the european union and african caribbean and pacific countries the paper empirically assesses the impact of the epas on trade flows and government revenue for 14 west african countries the results indicate that the decline in import duties due to the preferential tariff elimination might be of some cause for concern and that complementary fiscal and economic policies have to be implemented before or at the time the epas come into force

consumer acquisition patterns for durable goods australian evidence t he idea that households purchase consumer durables according to a specific acquisition pattern has been investigated by a number of researchers in the last two decades kasulis lusch and stafford 1979 lusch stafford and kasulis 1978 mcfall 1969 paroush 1965 pyatt 1964 hebden and pickering 1974 the most recent of these studies examined consumer acquisition patterns in oklahoma city for 12 heterogeneous products the authors concluded that the population has an underlying common order of acquisition for a large set of heterogeneous durables although meaningful population breakdowns reveal different patterns of acquisition but pointed out that these conclusions rest on the study being replicated and that future examinations should include studies across different sets of durable goods within different geographic samples and between other segmentation variables such as social class family life cycle and income groups kasulis lusch and stafford 1979 p 56 such studies are important as leone and schultz 1980 have pointed out for the ability to generalize research is necessarily based on the finding of supportive evidence in replicative work in line with this suggested research direction the present paper reports the findings of a study which in contrast to the oklahoma study involved both a different set of durable goods and a different geographic sample the study was undertaken in perth western australia and had three basic purposes first to determine whether a common acquisition order could be found for a large set of heterogeneous durables only some of which were included in the 1979 oklahoma study second to determine if the meaningful breakdowns between homeowners and home renters in oklahoma also existed in perth for this different set of durables and finally to determine whether there were differences between the american and australian acquisition patterns for those durables common to both studies such findings may point to some differences between the two countries and uncover potential marketing opportunities for some durables to test a general hypothesis in a different situation or with different data using the same methodology has been variously referred to throughout the literature as a nonexperimental leone and schultz 1980 or an operational lykken 1968 replication this form of replication is generally accepted as a rigorous approach to finding support for a stated hypothesis in fact leone and schultz 1980 make the point that it is the case of different situations which leads implicitly to broader generalizations p 12

the predictive power of the implied volatility of options traded otc and on exchanges abstract this paper investigates the efficiency of stock index options traded over the counter otc and on the exchanges in hong kong and japan our findings suggest that implied volatility is superior to either historical volatility or a garch type volatility forecast in predicting future volatility in both the otc and exchange markets this paper is also one of the first to compare the predictive power of the implied volatility of stock index options traded otc to that of exchange traded stock index options our evidence suggests that the otc market is more efficient than the exchanges in japan but that the opposite is true in hong kong

the performance of alternative valuation models in the otc currency options market abstract we compare option valuation models based on regime switching garch and jump diffusion processes to a standard smile model in which black and scholes 1973 implied volatilities are allowed to vary across strike prices the regime switching garch and jump diffusion models provide significant improvement over a fixed smile model in fitting gbp and jpy option prices both in sample and out of sample the jump diffusion model achieves the tightest fit a time varying smile model however provides hedging performance that is comparable to the other models for the gbp options this result suggests that standard option valuation techniques may provide a reasonable basis for trading and hedging strategies

forecasting the comovements of spot interest rates abstract time varying covariance models are compared in the french and german interest rate markets of the pre euro period a bivariate asymmetric dynamic covariance model with level effect best characterizes the in sample variance covariance dynamics model comparison using economic loss functions raises some doubts with alternative models performing similarly out of sample results show that the variance covariance matrix is best forecasted using a vech model with level effect but no volatility spillover not entirely confirming the in sample evidence simple models using exponentially weighted moving averages of past observations perform similarly to the best bivariate model thus some features required to obtain a good in sample fit do not have additional out of sample forecasting power due to overfitting

modeling heteroscedasticity in daily foreign exchange rates this article estimates autoregressive conditionally heteroscedastic arch and generalized arch garch models for five foreign currencies using 10 years of daily data a variety of arch and garch specifications a number of nonnormal error densities and a comprehensive set of diagnostic checks it finds that arch and garch models can usually remove all heteroscedasticity in price changes in all five currencies goodness of fit diagnostics indicate that exponential garch with certain nonnormal distributions fits the canadian dollar extremely well and the swiss franc and the deutsche mark reasonably well only one nonnormal distribution fits the japanese yen reasonably well none fit the british pound

in the eye of the storm the welfare impacts of a hurricane summary the impact of a large covariant shock namely hurricane mitch is examined in the context of household asset holdings in rural nicaragua utilizing household panel data from the period it is found that the hurricane did not have an adverse impact on the ownership of productive assets among the affected households on average on the other hand nonproductive asset holdings seem to have been significantly reduced a further examination confirms that the shock affected the poorest households disproportionally especially in terms of nonproductive assets finally this study presents strong suggestive evidence of a geographical poverty trap within the shock affected areas of the country

the road less travelled institutional aspects of data and their influence on empirical estimates with an application to tests of forward rate unbiasedness the difference between data used in empirical studies and that envisioned in the theory can influence empirical estimates sometimes by enough that the direction of future research is altered this paper illustrates how in the context of tests of forward rate unbiasedness a lack of articulation about the mechanics underlying foreign exchange market speculation and about the institutional aspects governing spot and forward rate contracts leads to sampling of the data in a way that is not consistent with the theory the authors find that the sampling problems account for some but not all of the bias in the coefficient on the forward premium copyright 1996 by royal economic society

stability and forecasting of the comovement measures of international stock market returns abstract the potential benefits to international diversification may be less if the comovement structure of international equity returns is non stationary than if it is this paper examines the intertemporal stability of the correlation and the covariance structure of the returns of ten major stock markets whilst empirical evidence supports the hypothesis that the correlation structure is stable over time the empirical support for the stability of the covariance matrix is much weaker alternative forecasting models of the comovement structure are examined

standard deviations implied in option prices as predictors of future stock price variability abstract standard deviations implied in option prices have recently been introduced as being better than average predictors of future stock price variability this article specifically studies the predictive ability of implicit standard deviations taking into account the dividend problem and the problem of optimal weighting schemes of the standard deviations when there are several options on the same stock transaction data information was used to study the importance of non simultaneities in observing stock and option prices