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

are all central bank interventions created equal an empirical investigation abstract this study investigates the relationship between central bank interventions and technical trading rule profitability in the spot foreign exchange market because interventions are not necessarily exogenous events we analyze the relationships between interventions by the g 3 central banks financial market conditions changes in monetary policy and technical trading profitability by considering announced unannounced unilateral and coordinated interventions separately we provide more insight into the interrelationships between these factors than previous studies we find that the level of technical trading profits and market uncertainty increase preceding and remain high during interventions especially announced and coordinated but decrease afterward a preliminary investigation of the possible role of a time varying risk premium around interventions cannot be rejected

economic policy uncertainty financial markets and probability of us recessions we use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by baker et al 2013 to predict future us recessions the model specifications include policy indexes on their own and in combination with financial variables such as interest rate spreads stock returns and stock market volatility both in sample and out of sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters the index based on newspaper reports emerges as the best predictor outperforming the term spread at the longer forecast horizons

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

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 importance of the volatility risk premium for volatility forecasting in this paper we study the role of the volatility risk premium for the forecasting performance of implied volatility we introduce a non parametric and parsimonious approach to adjust the model free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets using regression models and statistical loss functions we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models including its unadjusted counterpart our main finding holds for different choices of volatility estimators and competing time series models underlying the robustness of our results

the political reliability of italian governments an exponential survival model italian cabinets governi fall from power in a seemingly haphazard pattern thus defying most deterministic analyses of their durability this analysis views italian government longevity as essentially indeterminate or stochastic and it applies the theory of political reliability to explain the probability that an italian government will be in power at time t after it was formed an exponential survival model r e kt with constant government breakdown rate k 021 per week is developed estimated tested and discussed it is shown that italian governments have a half life of approximately 32 8 weeks after which their political reliability drops below 50 and their mean duration is 47 7 weeks so the probability that an italian government will survive as long as the average is only 36 8 theoretical aspects of the model are also discussed together with characteristic features of exponential political reliability such as lifetime density political mortality and government downfall rate as well as the systems reliability and crisis process characteristic of italian governments

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 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

the risk premium that never was a fair value explanation of the volatility spread abstract we present a new framework to investigate the profitability of trading the volatility spread the upward bias on implied volatility as an estimator of future realized volatility the scheme incorporates the first four option implied moments in a growth optimal payoff that is statically replicated using a portfolio of options removing the upward bias on implied volatility worsens the likelihood score of risk neutral densities obtained from s p 500 index options when they are used as forecasts of the underlying index return distribution it also results in negative expected capital growth when they are used in a volatility arbitrage scheme our empirical finding is that the upward bias on implied volatility does not represent a long term return premium rather it is required to mitigate the large losses associated with tail events when trading volatility in options markets

forecasting volatility of the u s oil market abstract we examine the information content of the cboe crude oil volatility index ovx when forecasting realized volatility in the wti futures market additionally we study whether other market variables such as volume open interest daily returns bid ask spread and the slope of the futures curve contain predictive power beyond what is embedded in the implied volatility in out of sample forecasting we find that econometric models based on realized volatility can be improved by including implied volatility and other variables our results show that including implied volatility significantly improves daily and weekly volatility forecasts however including other market variables significantly improves daily weekly and monthly volatility forecasts

the asymmetric impact of oil prices interest rates and oil price uncertainty on unemployment in the us abstract in this study we investigate the presence of asymmetric interactions between oil prices oil price uncertainty interest rates and unemployment in a cointegration framework utilizing the nonlinear auto regressive distributed lag nardl approach we show the asymmetric responses of unemployment to changes in oil prices oil price uncertainty and interest rates in the long run more specifically the results of our analyses suggest that an increase in oil price results in increased unemployment while there is no significant impact of reduced oil prices on the one hand reduced oil price uncertainty leads to a decrease in unemployment whereas an increase in oil price uncertainty does not have an impact we also observe increased unemployment in response to a decrease in interest rates as the impact of increased interest rates is not significant last but not least we find that option implied oil price volatility as a measure of oil price uncertainty outperforms the conditional volatility of crude oil prices in predicting unemployment this study provides valuable implications for policymakers to design sound economic policies

commodity price changes and the predictability of economic policy uncertainty in this study we forecast economic policy uncertainty epu using input on 23 commodity price changes we reveal the significant predictability of epu using three forecast combinations this indicates that commodity price changes can be taken as a leading indicator of epu

multiscale behaviour of volatility autocorrelations in a financial market abstract we perform a scaling analysis on nyse daily returns we show that volatility correlations are power laws on a time range from one day to one year and more important that the exponent is not unique consistently with a multiscale behaviour

economic policy uncertainty shocks economic activity and exchange rate adjustments abstract we investigate the impact of foreign and domestic economic policy uncertainty epu shocks on the uk economy simulations with a structural var model indicate that domestic industrial production declines after a shock to the epu index in the us on the contrary disturbances to domestic uncertainty are an important source of real exchange rate fluctuations historical decomposition shows that a surge in domestic epu after brexit referendum was the reason behind a massive depreciation of the british pound these results are robust to different model specifications

the predictive power of implied volatility evidence from 35 futures markets abstract using data from 35 futures options markets from eight separate exchanges we test how well the implied volatilities ivs embedded in option prices predict subsequently realized volatility rv in the underlying futures we find that for this broad array of futures options iv performs well in a relative sense for a large majority of the commodities studied the implieds outperform historical volatility hv as a predictor of the subsequently rv in the underlying futures prices over the remaining life of the option indeed in most markets examined regardless of whether it is modeled as a simple moving average or in a garch framework hv contains no economically significant predictive information beyond what is already incorporated in iv these findings add to previous research that has focused on currency and crude oil futures by extending the analysis into a very broad array of contracts and exchanges our results are consistent with the hypothesis that futures options markets in general with their minimal trading frictions are efficient

comparative economic voting britain france germany italy likelihood of a vote for the incumbent coalition in contrast personal economic circumstances no matter how measured demonstrate nonexistent to weak effects on vote choice overall economic conditions emerge as a relatively important vote determinant when a more properly specified general multi equation model of the vote is estimated economics shows itself to be as powerful as traditional factors used to explain the western european vote in particular economic variables exceed the impact of partisan identification in britain and roughly equal it in germany moreover the economic variables exercise more influence than the social cleavages of class and religion everywhere except italy

pricing european currency options a comparison of the modified black scholes model and a random variance model we use the modified black scholes model and a random variance option pricing model to study prices of european currency options traded in geneva the options which cannot be exercised early include calls and puts on the dollar swiss franc exchange rate in the empirical analysis we examine the model fit and the biases with respect to the strike price time to maturity and volatility there is some evidence of mispricing and there are small gains available by trading with the random variance model

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

expectations and informal rules in coalition formation why do informal rules emerge alongside and at variance with the formal constitutional constraints that shape bargaining over coalition governments the presence of informal rules at odds with formal rules appears as an anomaly within both institution free and institution focused theories of coalitions the author argues that politicians create informal rules in order to alter formal institutions that do not function to their benefit the costs of a formal change in institutions offer incentives to politicians to invent informal rules as alternatives to such change and repeated interactions teach politicians what to expect and then invent the author s emphasis on the manipulability of rules echoes long standing themes in the study and practice of politics

fear connectedness among asset classes this study investigates the interconnection between five implied volatility indices representative of different financial markets during the period 1 august 2008 29 december 2017 to this end we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period the system wide approach using a framework recently proposed by diebold and yilmaz second we make use of a dynamic analysis to evaluate both the net directional connectedness for each market and all net pairwise directional connectedness our results suggest that a 38 99 of the total variance of the forecast errors is explained by shocks across markets indicating that the remainder 61 01 of the variation is due to idiosyncratic shocks furthermore we find that volatility connectedness varies over time with a surge during periods of increasing economic and financial instability finally we also document frequently switch between a net volatility transmitter and a net volatility receiver role in the five markets under study

the weekend effect on the distribution of stock prices abstract evidence of weekend effects on the distribution of security returns suggests that returns are generated by a process operating closer to trading time rather than calendar time in contrast accumulation of interest over the weekend follows a calendar time process since both the variance of returns and the interest rate are important parameters of the black scholes option pricing model this paper suggests that the model be stated to account for this by utilizing a trading time variance and a calendar time interest rate empirical evidence indicates that this allows the model to better explain market option prices

the directional volatility connectedness between crude oil and equity markets new evidence from implied volatility indexes in this paper we use a set of newly introduced implied volatility indexes to investigate the directional connectedness between oil and equities in eleven major stock exchanges around the globe from 2008 to 2015 the inference on the oil equity implied volatility relationships depends on diebold and yilmaz 2012 2014 2015 who proposed a set of directional measures that enable the dynamic and directional characterization of the relationships among financial variables we find uniform results across the sample countries indicating that the connectedness between oil and equity is established by the bi directional information spillovers between the two markets however we find that the bulk of association is largely dominated by the transmissions from the oil market to equity markets and not the other way around the pattern of transmissions is varying over the sample period however most of the linkages between oil and equities are established from the mid of 2009 to the mid of 2012 which is a period that witnessed the start of global recovery

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

deutsche mark dollar volatility intraday activity patterns macroeconomic announcements and longer run dependencies this paper provides a detailed characterization of the volatility in the deutsche mark dollar foreign exchange market using an annual sample of five minute returns the approach captures the intraday activity patterns the macroeconomic announcements and the volatility persistence arch known from daily returns the different features are separately quantified and shown to account for a substantial fraction of return variability both at the intraday and daily level the implications of the results for the interpretation of the fundamental driving forces behind the volatility process is also discussed the efficient market hypothesis contends that financial asset prices provide rational assessments of fundamental values and future payoffs by implication price changes should reflect the arrival and processing of all relevant new information however the proportion of return variability that can be ascribed to public news announcements is low for example cutler poterba and summers 1989 find that even the largest daily price changes in the stock market generally cannot be associated with any significant economic news 1 moreover proxies for the flow of public information e g the number of news items released by reuter s news service berry and hiowe 1994 or dow jones company mitchell and mulherin 1994 explain little of the overall variation thus if private information is ruled out proponents of rational price formation have to assert the existence of important news items

predicting u s recessions financial variables as leading indicators this paper examines the out of sample performance of various financial variables as predictors of u s recessions series such as interest rates and spreads stock prices and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators the analysis focuses on out of sample performance from one to eight quarters ahead results show that stock prices are useful with one to three quarter horizons as are some well known macroeconomic indicators beyond one quarter however the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables

does implied volatility provide any information beyond that captured in model based volatility forecasts this paper contributes to our understanding of the informational content of implied volatility here we examine whether the s p 500 implied volatility index vix contains any information relevant to future volatility beyond that available from model based volatility forecasts it is argued that this approach differs from the traditional forecast encompassing approach used in earlier studies the findings indicate that the vix index does not contain any such additional information relevant for forecasting volatility

s p 100 index option volatility using transaction data on the s p 100 index options we study the effect of valuation simplifications that are commonplace in previous research on the timeseries properties of implied market volatility using an american style algorithm that accounts for the discrete nature of the dividends on the s p 100 index we find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and the index level negative serial correlation is also induced by a bid ask price effect if a single option is used to estimate implied volatility in addition we find that these same effects induce spurious and unreasonable negative cross correlations between the changes in call and put implied volatility an important area of current research is the estimation and behavior of market volatility implied by option pricing models for example stein 1989 concludes that the s p 100 index option market is inefficient because longer term options overreact to changes in the implied volatility of short maturity options day and lewis 1988 document an increase in volatility around the quarterly expiration cycle schwert 1990 draws conclusions about the behavior of volatility around the stock market crash of 1987 by using implied volatility all of these studies use a simplified option pricing framework to estimate implied market volatility previous research generally assumes that the s p 100 index option is european style this option is actually american style it is also common to assume that the dividend yield is constant the dividends are not constant and exhibit distinct seasonal patterns harvey and whaley 1991b show that large pricing errors can be induced in the option prices if the american feature and the discrete dividends are ignored option pricing errors translate into errors in the implied volatility estimates this paper uses s p 100 index call and put transactions and an american style option pricing model with the exact discrete dividend series to calculate a time series of implied volatilities this valuation method

economic policy uncertainty shocks and stock bond correlations evidence from the us market abstract this paper examines the effects of economic policy uncertainty shocks on stock bond correlations for the us market we devise a general framework which distinguishes a positive shock from a negative one and nests either as its special case the results show that innovations in the policy uncertainty index impact negatively and asymmetrically on the subsequent stock bond correlations which are characterized by a structural break and positive type asymmetry

preference voting in italy votes of opinion belonging or exchange intraparty preference voting is a potentially important possibility for voters in many proportional representation systems especially the italian system three hypotheses that preference voting is

the risk premium of volatility implicit in currency options this article provides an empirical investigation of the risk neutral variance process and the market price of variance risk implied in the foreign currency options market there are three principal contributions first the parameters of heston s mean reverting square root stochastic volatility model are estimated using dollar mark option prices from 1987 to 1992 second it is shown that these implied parameters can be combined with historical moments of the dollar mark exchange rate to deduce an estimate of the market price of variance risk these estimates are found to be nonzero time varying and of sufficient magnitude to imply that the compensation for variance risk is a significant component of the risk premia in the currency market finally the out of sample test suggests that the historical variance and the hull and white implied variance contain no more information than that imbedded in the heston implied variance

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

predicting currency return volatility abstract standard deviations and elasticity of variance coefficients implied in currency option prices are employed to predict subsequent currency return volatility despite documented variance non stationarity strong predictive relationships are found the predictive accuracies of standard deviations and elasticity coefficients are statistically indistinguishable finally predictive accuracy is invariant to the weighting techniques employed

does policy stability increase the constitutional court s independence the case of italy during the first republic 1956 1992 in this paper we consider thesentences of constitutional illegitimacy bythe italian constitutional court in thefirst republic 1956 1992 as a measure ofits independence from politicians we focuson the court s incidental review and testwhether the court s independence increaseswhen there is more policy stability namelywhen politicians are less able to changethe policy status quo by legislation wefollow tsebelis 2002 in assuming thatlegislative policy change is less likelywhen either the number and or ideologicaldistance of veto players increases as aproxy for the size of the veto players pareto set we use either the number ofparties in government or the number ofparties forming a constitutional majorityin parliament or the number of effectiveparties in parliament or measures ofideological distance based on laver andhunt 1992 by controlling for the court sdegree of internal cohesion cointegrationanalysis shows that there is a stable andpositive long run relationship between thecourt s independence and proxy measures ofthe degree of policy stability

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

comparative forecasting performance of symmetric and asymmetric conditional volatility models of an exchange rate abstract the relative out of sample forecasting quality of symmetric and asymmetric conditional volatility models of an exchange rate differs according to the symmetric and asymmetric evaluation criteria both symmetric and asymmetric forecast competitors of currency volatility are biased and systematically over predict volatility

the information content of implied volatilities and model free volatility expectations evidence from options written on individual stocks abstract we measure the volatility information content of stock options for individual firms using option prices for 149 us firms and the s p 100 index we use arch and regression models to compare volatility forecasts defined by historical stock returns at the money implied volatilities and model free volatility expectations for every firm for 1 day ahead estimation a historical arch model outperforms both of the volatility estimates extracted from option prices for 36 of the firms but the option forecasts are nearly always more informative for those firms that have the more actively traded options when the prediction horizon extends until the expiry date of the options the option forecasts are more informative than the historical volatility for 85 of the firms however at the money implied volatilities generally outperform the model free volatility expectations

overreactions in the options market this paper examines the term structure of options implied volatilities using data on s p 100 index options because implied volatility is strongly mean reverting the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option empirically this elasticity turns out to be larger than suggested by rational expectations theory long maturity options tend to overreact to changes in the implied volatility of short maturity options are investors rational do they behave like bayesian statisticians when it comes to incorporating new information into asset prices proponents of the efficient markets hypothesis would answer this question in the affirmative many others however believe that bayesian rationality is a poor description of investor behavior and that as a consequence asset prices tend to be informationally inefficient one way in which inefficiencies might arise is through the overreactions of traders to the arrival of new information 1 this possibility is raised by experimental and survey findings which indicate that people have a systematic tendency to overemphasize recent data at the expense of other information when making projections 2 the objective of this paper is to search for evidence of such overreactive behavior in a semingly peculiar place the options market options may appear to be unlikely candidates for overreaction because unlike primary securities their prices are closely tied down by arbitrage considerations as black and scholes 1973 demonstrate if stock price volatility is known options prices are completely determined any deviation from the prescribed value implies a riskless profit opportunity however given that volatility is in fact unknown and changing options do retain something of an independent nature not wholly redundant with their underlying stocks options can be thought of as reflecting a speculative market in volatility the implied volatility on a given option obtained by inverting a

volatility in crude oil futures a comparison of the predictive ability of garch and implied volatility models the wti future contract quoted at the nymex is the most actively traded instrument in the energy sector this paper compares the predictive ability of two approaches which can be used to forecast volatility garch type models where forecasts are obtained after estimating time series models and an implied volatility model where forecasts are obtained by inverting one of the models used to price options although the main scope of the research discussed here is to evaluate which model produces the best forecast of volatility for the wti future contract evaluated according to statistical and regression based criteria we also investigate whether volatility of the oil futures are affected by asymmetric effects whether parameters of the garch models are influenced by the distribution of the errors and whether allowing for a time varying long run mean in the volatility produces any improvement on the forecast obtained from garch models

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

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

does economic policy uncertainty in the u s influence stock markets in china and india time frequency evidence this paper uses continuous and discrete wavelet tools to evaluate the dynamic correlation and causality between the u s economic policy uncertainty epu and stock markets in china and india from

economic policy uncertainty in the us does it matter for the euro area abstract we investigate the effects of a us economic policy uncertainty shock on some euro area macroeconomic aggregates via structural vars we model the indicators of economic policy uncertainty recently developed by baker et al 2013 jointly with the aggregate price indexes and alternative indicators of the business cycle for the two above indicated economic areas according to our svars a one standard deviation shock to us economic policy uncertainty leads to a statistically significant fall in the european industrial production and prices of 0 12 and 0 06 respectively the contribution of the us uncertainty shock on the european aggregates is shown to be quantitatively larger than the one exerted by an euro area specific uncertainty shock

tax uncertainty and business activity abstract we investigate the extent to which uncertainties about tax policies affect business activities we develop a statewide tax uncertainty measure tu measure and show that it captures state corporate tax uncertainty by comparing adjacent counties across state borders we show that increasing tax uncertainty by one standard deviation a 30 increase in the tu measure leads to a 0 17 point per year decrease in the growth rate of establishments over two years the result holds after conducting a variety of robustness checks and is not likely to be driven by general state policy uncertainties

forecasting us recessions the role of economic uncertainty this letter highlights the role of macroeconomic and financial uncertainty in predicting us recessions in sample forecasts using probit models indicate that the two variables are the best predictors of recessions at short horizons macroeconomic uncertainty has the highest predictive power up to 7 months ahead and becomes the second best predictor after the yield curve slope at longer horizons using data up to end 2018 out of sample forecasts show that uncertainty has significantly contributed to lower the probability of a recession in 2019 which indeed did not occur

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested

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

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

more than a feeling confidence uncertainty and macroeconomic fluctuations economists observers and policy makers often emphasize the role of sentiment as a potential driver of the business cycle in this paper we provide three contributions to this debate first we give an overview of the recent literature on the nexus between sentiment considering both confidence and uncertainty and economic activity second we review existing empirical measures of sentiment in particular consumer confidence stock market volatility smv and economic policy uncertainty epu on monthly data for 27 countries 1985 2016 third we identify some new stylized facts based on international evidence while different measures are surprisingly lowly correlated on average in each country they are typically highly positively correlated across countries suggesting the existence of a global factor or sizeable international spillovers of sentiment consumer confidence has the closest co movement with economic and financial variables and most of the correlations are contemporaneous or forward looking consistent with the view that economic sentiment is indeed a driver of activity

dynamics of realized volatilities and correlations an empirical study abstract this study examines two important issues underlying realized volatility and correlation estimators first an empirical inquiry is conducted to assess whether bax and eurodollar futures tick by tick data can be characterized as marked point processes second arma neural network garch bekk and naive volatility and correlation forecasts are compared in an out of sample context when a trader prices an interest rate spread option based on those forecasts and simultaneously delta hedges her position other loss functions are also considered competing volatility forecasts are also compared to implied volatilities

implied exchange rate distributions evidence from otc option markets abstract this paper uses a rich new dataset of option prices on the dollar mark dollar yen and key ems cross rates to extract the entire risk neutral probability density function pdf over horizons of 1 and 3 months we compare three alternative smoothing methods cubic splines an implied binomial tree trimmed and untrimmed and a mixture of lognormals for transforming option data into the pdf despite their methodological differences the three approaches lead to a similar pdf clearly distinct from the lognormal benchmark and typically characterized by skewness and leptokurtosis we then document a striking positive correlation between skewness in these pdfs and the spot rate the stronger a currency the more expectations are skewed towards a further appreciation of that currency we interpret this finding as a rejection that innovations in these exchange rates are independent of the level or characteristic of a credible target zone explicit or implicit instead this positive correlation is consistent with target zones with endogenous realignment risk we discuss two interpretations of our results on skewness when a currency is stronger the actual probability of further large appreciation is higher or because of risk such states are valued more highly

testing the uncovered interest parity using traded volatility a time varying risk premium and heterogeneous expectations abstract this paper carries out an empirical investigation of an extended version of flood and marion s 2000 self fulfilling risk predictions an application to speculative attacks journal of international economics 50 245 268 uip model which incorporates a nonlinear time varying risk premium that depends on both the expected variance of the future exchange rate and the relative worldwide private holdings of domestic and foreign government bonds a novel contribution of our paper is the use of traded currency volatility which is directly observable in the market place to measure expectations about the future volatility of the exchange rate another contribution is the explicit modelling of heterogeneous exchange rate expectations formed by forward looking fundamentalists and backward looking chartists our overall empirical evidence provides strong support for the extended nonlinear uip model we also investigate for the first time the role of traded volatility in the dynamic behaviour of exchange rates and find that high currency volatility is likely to produce oscillatory and unstable exchange rate paths

macroeconomic policy uncertainty shocks on the chinese economy a gvar analysis abstractthis article studies the spillovers of economic policy uncertainty epu from developed economies to china in terms of the source extent and persistence by estimating a global vector autoregressive gvar model with both financial and trade variables acting as the transmission channels our findings confirm the existence of international transmissions of policy uncertainty while the patterns differ markedly the us epu appears to be the most significant cause of the fall of export industrial production equity price and exchange rate meanwhile the eu epu is also to be blamed for the depreciation of rmb in contrast to industrial production which shows the largest negative impact chinese inflation increases to a relatively smaller extent with the epu shocks ranking as the us japanese and the eu regardless of the minor impact on a long term interest rate the short term interest rate in china reacts positively to the european and us epu shocks despite the independent national monetary poli

the core and the stability of group choice in spatial voting games the core of a voting game is the set of undominated outcomes that is those that once in place cannot be overturned for spatial voting games a core is structurally stable if it remains in existence even if there are small perturbations in the location of voter ideal points while for simple majority rule a core will exist in games with more than one dimension only under extremely restrictive symmetry conditions we show that for certain supramajorities a core must exist we also provide conditions under which it is possible to construct a structurally stable core if there are only a few dimensions our results demonstrate the stability properties of such frequently used rules as two thirds and three fourths we further explore the implications of our results for the nature of political stability by looking at outcomes in experimental spatial voting games and at belgian cabinet formation in the late 1970s

fluctuations in uncertainty this review article tries to answer four questions i what are the stylized facts about uncertainty over time ii why does uncertainty vary iii do fluctuations in uncertainty matter and iv did higher uncertainty worsen the great recession of 2007 2009 on the first question both macro and micro uncertainty appears to rise sharply in recessions on the second question the types of exogenous shocks like wars financial panics and oil price jumps that cause recessions appear to directly increase uncertainty and uncertainty also appears to endogenously rise further during recessions on the third question the evidence suggests uncertainty is damaging for short run investment and hiring but there is some evidence it may stimulate longer run innovation finally in terms of the great recession the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in gdp

modeling and predicting the cboe market volatility index abstract this paper performs a thorough statistical examination of the time series properties of the daily market volatility index vix from the chicago board options exchange cboe the motivation lies not only on the widespread consensus that the vix is a barometer of the overall market sentiment as to what concerns investors risk appetite but also on the fact that there are many trading strategies that rely on the vix index for hedging and speculative purposes preliminary analysis suggests that the vix index displays long range dependence this is well in line with the strong empirical evidence in the literature supporting long memory in both options implied and realized variances we thus resort to both parametric and semiparametric heterogeneous autoregressive har processes for modeling and forecasting purposes our main findings are as follows first we confirm the evidence in the literature that there is a negative relationship between the vix index and the s p 500 index return as well as a positive contemporaneous link with the volume of the s p 500 index second the term spread has a slightly negative long run impact in the vix index when possible multicollinearity and endogeneity are controlled for finally we cannot reject the linearity of the above relationships neither in sample nor out of sample as for the latter we actually show that it is pretty hard to beat the pure har process because of the very persistent nature of the vix index

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

conditional volatility skewness and kurtosis existence persistence and comovements abstract recent portfolio choice asset pricing value at risk and option valuation models highlight the importance of modeling the asymmetry and tail fatness of returns these characteristics are captured by the skewness and the kurtosis we characterize the maximal range of skewness and kurtosis for which a density exists and show that the generalized student t distribution spans a large domain in the maximal set we use this distribution to model innovations of a garch type model where parameters are conditional after demonstrating that an autoregressive specification of the parameters may yield spurious results we estimate and test restrictions of the model for a set of daily stock index and foreign exchange returns the estimation is implemented as a constrained optimization via a sequential quadratic programming algorithm adequacy tests demonstrate the importance of a time varying distribution for the innovations in almost all series we find time dependency of the asymmetry parameter whereas the degree of freedom parameter is generally found to be constant over time we also provide evidence that skewness is strongly persistent but kurtosis is much less so a simulation validates our estimations and we conjecture that normality holds for the estimates in a cross section setting we also document covariability of moments beyond volatility suggesting that extreme realizations tend to occur simultaneously on different markets

inflation unemployment and government collapse a poisson application as democracies enter an era of economic retrenchment the political costs associated with economic decline have come under close scrutiny by students of comparative politics and public policy of particular concern is the linkage between inflation unemployment and the collapse of incumbent governments the present study provides an initial application of an alternative approach to measuring this linkage across 8 european democracies and offers significant evidence linking political costs for cabinet governments with rising prices and the growing unemployment by utilizing the poisson method of determining probabilities of discrete events increasing probabilities of government collapse are significantly associated with rising inflation and unemployment in european democracies between january 1958 and december 1979 subsequent use of the sanders and herman s 1977 and warwick 1979 analyses of cabinet stability provides a useful means to disaggregate the nation sample of the study into four discrete s

the creation and resolution of market uncertainty the impact of information releases on implied volatility we model and examine the impact of information releases on market uncertainty as mea sured by the implied standard deviation isd from option markets distinguishing between scheduled and unscheduled announcements we hypothesize that since the timing although not the content of scheduled announcements is known a priori the pre release isd will impound the anticipated impact of important releases on price volatility and that the isd will normally decline post release as this uncertainty is resolved conversely we hypothesize that the unexpected high volatility caused by major unscheduled releases will cause market participants to adjust upward their estimates of likely volatility over the remaining life of the option resulting in an increase in the isd our evidence supports both hypotheses the isds that we consider are from the t bond eurodollar and deutschemark options markets we examine scheduled macroeconomic news releases such as the employment report and the ppi we also find that the observed tendency for the isd to fall on fridays and rise on mondays is due to the weekday pattern of scheduled news releases

using implied volatility on options to measure the relation between asset returns and variability abstract prior research has documented that volatility in financial asset markets is most directly related to trading rather than calendar days and that there is an inverse asymmetric relation between volatility and returns in both stocks and long term bonds we examine these relations in 37 futures options markets representing a wide variety of asset types using futures prices and implied volatilities from this extensive array of markets we confirm that in all of them save one market volatility is more directly related to trading days however the nature of the association between implied volatility and underlying asset returns varies greatly across asset categories and across exchanges thus we show that findings from equity markets apparently are not generalizable to other asset classes

forecasting stock market volatility and information content of implied volatility index abstractthis study investigates the incremental information content of implied volatility index relative to the garch family models in forecasting volatility of the three asia pacific stock markets

valuation of american futures options theory and empirical tests this paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the s p 500 equity futures option market the american futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in the money and to the option s time to expiration the models are also shown to generate abnormal risk adjusted rates of return after transaction costs the joint hypothesis that the american futures option pricing models are correctly specified and that the s p 500 futures option market is efficient is refuted at least for the sample period january 28 1983 through december 30 1983 futures option contracts now trade on every major futures exchange and on a wide variety of underlying futures contracts the chicago mercantile exchange the chicago board of trade the new york futures exchange and the commodity exchange now collectively have more than twenty options written on futures contracts where the underlying spot commodities are financial assets such as stock portfolios bonds notes and eurodollars foreign currencies such as west german marks swiss francs and british pounds precious metals such as gold and silver livestock commodities such as cattle and hogs and agricultural commodities such as corn and soybeans moreover new contract applications are before the commodity futures trading commission and should be actively trading in the near future with the markets for these new contingent claims becoming increasingly active it is appropriate that the fundamentals of futures option valuation be reviewed and tested black 5 provides a framework for the analysis of commodity futures options although his work is explicitly directed at pricing european options on forward contracts it applies to european futures contracts as well if the riskless rate of interest is constant during the futures option life 1 the options currently

implied volatility dynamics in the foreign exchange markets abstract the purpose of this study is to examine the dynamics of implied volatilities derived from the major currency options on futures several studies have examined the properties of implied volatilities in the equity and interest markets however very little is known about the dynamics of implied volatilities derived from the currency options markets which is the subject of this paper the results show that participants in the currency market tend to expect higher future volatility when the currency market fluctuates in a large scale regardless of the direction implying that uncertainty as measured by implied volatility would be higher when movements of exchange rates are large we also provide evidence that in the foreign exchange markets the traders trading pattern or the private information in addition to the public information also drive the intraweek implied volatility patterns finally we document that it would be difficult to earn abnormal trading profits with portfolios based on the observed patterns of implied volatilities and conclude that the foreign exchange options on futures market is efficient in this sense

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

is there a role for uncertainty in forecasting output growth in oecd countries evidence from a time varying parameter panel vector autoregressive model this paper uses a time varying parameter panel vector autoregressive tvp pvar model to analyze the role played by domestic and us news based measures of uncertainty in forecasting the growth of industrial production of 12 organisation for economic co operation and development oecd countries based on a monthly out of sample period of 2009 06 to 2017 05 given an in sample of 2003 03 to 2009 05 there are only 46 of cases where domestic uncertainty can improve the forecast of output growth relative to a baseline monetary tvp pvar model which includes inflation interest rate and nominal exchange rate growth besides output growth moreover including us uncertainty does not necessarily improve the forecasting performance of output growth from the tvp pvar model which includes only the domestic uncertainty along with the baseline variables so in general while uncertainty is important in predicting the future path of output growth in the 12 advanced economies considered a forecaster can do better in majority of the instances by just considering the information from standard macroeconomic variables

forecasting volatility of futures market the s p 500 and ftse 100 futures using high frequency returns and implied volatility we show that historical volatility from high frequency returns outperforms implied volatility when standardized returns by historical volatility tends to be normally distributed for the ftse 100 futures we find that historical volatility using high frequency returns outperforms implied volatility in forecasting future volatility however we find that implied volatility outperforms historical volatility in forecasting future volatility for the s p 500 futures the results also indicate that historical volatility using high frequency returns could be an unbiased forecast for the ftse 100 futures 1 we thank christopher lowes for his excellent research assistance

the costs of coalition coalition theories and italian governments governments in italy both change and remain the same from 1946 to 1992 the christian democratic party always held governing power but almost no cabinet stayed in office more than a few years and many governments collapsed after only a few months how can instability coexist with stability in this way how can governments break up at such low cost and with so little effect on alternation these questions are rooted in but not resolved by the available game theoretic literature on coalitional behavior my answer is that politicians purposive actions can reduce the costs of coalition i argue that the costs of making breaking and maintaining coalitions depend on political institutions and on the array of parties and voters in policy space institutional and spatial conditions structure politicians opportunities and attempts to lower costs under some conditions as i show coalitions are cheap and politicians can easily make coalitions even cheaper the inference is that this framework comprehends both italy s extremes and the degrees of stability found in other parliamentary democracies

a unified model of cabinet dissolution in parliamentary democracies the literature on cabinet duration is split between two apparently irreconcilable positions the attributes theorists seek to explain cabinet duration as a fixed function of measured explanatory variables while the events process theorists model cabinet durations as a product of purely stochastic processes in this paper we build a unified statistical model that combines the insights of these previously distinct approaches we also generalize this unified model and all previous models by including 1 a stochastic component that takes into account the censoring that occurs as a result of governments lasting to the vicinity of the maximum constitutional interelection period 2 a systematic component that precludes the possibility of negative duration predictions and 3 a much more objective and parsimonious list of explanatory variables the explanatory power of which would not be improved by including a list of indicator variables for individual countries

the forecasting accuracy of implied volatility from ecx carbon options abstract this study analyzes the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of co 2 emission allowances carbon options traded on the european climate exchange we demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options it is also directionally accurate in predicting future volatility changes however we also find that implied volatility of carbon options is biased especially for periods of time which do not coincide with the remaining life of the option this suggests that the market has yet to fully mature