sign and volatility switching arch models theory and applications to international stock markets summary this paper develops two conditionally heteroscedastic models which allow an asymmetric reaction of the conditional volatility to the arrival of news such a reaction is induced by both the sign of past shocks and the size of past unexpected volatility the proposed models are shown to converge in distribution to

strategic non intervention and the choice of trade policy for international oligopoly abstract this paper analyzes a game of strategic trade policy between governments who may choose among quantity controls subsidies and non intervention as policy instruments central to the analysis is our view of non intervention as a distinct policy choice we derive conditions under which non intervention is strictly preferred to the alternative instruments preferences between non intervention and the nash equilibrium subsidy confirm to a simple distance measure involving the stackelberg leadership subsidy the subsidy level zero or nash that is closest to the stackelberg subsidy being preferred

the statistical properties of daily foreign exchange rates 1974 1983 abstract this paper examines the statistical properties of daily rates of change of five foreign currencies from 1974 to 1983 the main purpose is to discriminate between two competing explanations for the observed heavy tails of the distribution that the data are independently drawn from a heavy tail distribution which remains fixed over time and that the data come from distributions which vary over time evidence point to the rejection of the first hypothesis further investigations show that the rejection can be attributed to changing means and variances in the data which can be described by a simple statistical model

the volatility of australian traded goods prices it is generally accepted that the australian economy is continually subject to unanticipated shocks particularly unexpected swings in the prices of australia s internationally traded goods this article empirically investigates the nature and extent of volatility in import and export prices faced by the australian production sector it estimates multivariate garch models of the stochastic processes generating the prices of imports and exports and of important components of exports and imports this article proposes an index of volatility which is used to provide a summary measure of the extent of volatility in a multivariate context the overall conclusion is that the price growth rates for australia s traded goods exhibit considerable time variation in volatility and that these price growth rates are highly and positively correlated with each other

conditional var estimation using pearson s type iv distribution abstract this paper presents a new value at risk var estimation model for equity returns time series and tests it extensively on stock indices of 14 countries two most important stylized facts of such series are volatility clustering and non normality as a result of fat tails of the return distribution while volatility clustering has been extensively studied using the garch model and its various extensions the phenomenon of non normality has not been comprehensively explored at least in the context of var estimation a combination of extreme value theory evt and garch has been explored to analyze financial data showing non normal behavior this paper proposes a combination of the pearson s type iv distribution and the garch 1 1 approach to furnish a new method with superior predictive abilities the approach is back tested for the entire sample as well as for a holdout sample using rolling windows

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

policy credibility in the erm evidence from six countries using an arch approach the issue of credibility and capital mobility in the ems is re examined using an alternative methodology as well as a longer sample period than previous studies in particular the dynamic relationship between interest rate differentials and the exchange rate risk premium is emphasized the relationship between the premium and credibility is then used in order to identify patterns of credibility in erm countries credibility in the case of italy has declined post 1985 as indicated by the rising exchange rate risk premium for denmark france and ireland credibility seems to be increasing up to the currency crisis period and for belgium and holland credibility increased early in the period and remained high during the rest of the period

the credit crunch in east asia what can bank excess liquid assets tell us abstract the paper proposes a two step approach to assess the extent to which the fall in credit in crisis stricken east asian countries was a supply or demand induced phenomenon the first step is based on the estimation of demand function for excess liquid assets by commercial banks such a function is derived analytically in the first part of the paper the second step consists of establishing dynamic projections for the periods following the crisis and assessing whether or not residuals are large enough to be viewed as indicators of involuntary accumulation of excess reserves results for thailand indicate that the contraction in bank lending that accompanied the crisis was the result of supply factors

pre commitment and flexibility abstract this paper considers several related strategic duopoly settings in which uncertainty creates an option value from retaining flexibility by delaying investment or output decisions until after uncertainty is resolved this value of flexibility must be weighed against the strategic value of pre commitment yielding a trade off between flexibility and pre commitment we obtain a simple characterization of the timing of output decisions as a consequence of the degree of uncertainty particular attention is paid to the implications for entry deterrence by an incumbent firm and to the possible flexibility enhancing effects of investment in capital

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

strategic export promotion and import protection in a multi stage game this paper presents a three stage trade policy game between one importing country and one exporting country in which the formulation of trade policy is distinguished from its administration the salient feature of this game is that both countries have the opportunity to choose a free trade policy the author shows that there always exists a subgame perfect equilibrium in which the exporting country chooses the free trade policy and the importing country chooses an import tariff or quota

transmission of prices and price volatility in australian electricity spot markets a multivariate garch analysis this paper examines the transmission of spot electricity prices and price volatility among the five regional electricity markets in the australian national electricity market namely new south wales queensland south australia the snowy mountains hydroelectric scheme and victoria a multivariate generalised autoregressive conditional heteroskedasticity model is used to identify the source and magnitude of price and price volatility spillovers the results indicate the presence of positive own mean spillovers in only a small number of markets and no mean spillovers between any of the markets this appears to be directly related to the physical transfer limitations of the present system of regional interconnection nevertheless the large number of significant own volatility and cross volatility spillovers in all five markets indicates the presence of strong autoregressive conditional heteroskedasticity and generalised autoregressive conditional heteroskedasticity effects this indicates that shocks in some markets will affect price volatility in others finally and contrary to evidence from studies in north american electricity markets the results also indicate that australian electricity spot prices are stationary

market risk in commodity markets a var approach we put forward value at risk models relevant for commodity traders who have long and short trading positions in commodity markets in a 5 year out of sample study on aluminium copper nickel brent crude oil and wti crude oil daily cash prices and cocoa nearby futures contracts we assess the performance of the riskmetrics skewed student aparch and skewed student arch models while the skewed student aparch model performs best in all cases the skewed student arch model delivers good results and its estimation does not require non linear optimization procedures as such this new model could be relatively easily integrated in a spreadsheet like environment and used by market practitioners

persistence in variance structural change and the garch model this article examines the persistence of the variance as measured by the generalized autoregressive conditional heteroskedasticity garch model in stock return data in particular we investigate the extent to which persistence in variance may be overstated because of the existence of and failure to take account of deterministic structural shifts in the model both an analysis of daily stock return data and a monte carlo simulation experiment confirm the hypothesis that garch measures of persistence in variance are sensitive to this type of model misspecification

bidding behavior in the longer term refinancing operations of the european central bank evidence from a panel sample selection model abstract this paper analyzes individual bidding data of the longer term refinancing operations ltros of the european central bank we investigate how banks bidding behavior is related to a series of exogenous variables including collateral costs interest rate expectations market volatility and to individual bank characteristics like country of origin size and experience a specific feature of these auctions is that the number and composition of bidders varies over time therefore we estimate panel sample selection models to control for a bank s endogenous participation decision we find that bidding strategies depend on the banks attributes yet different bidding behavior generally does not translate into differences concerning bidder success there is evidence for the winner s curse effect in ltros indicating a common value component in banks demand for longer term refinancing

testing for nonlinear dependence in daily foreign exchange rates the purpose of this article is to investigate whether daily changes in five major foreign exchange rates contain any nonlinearities although the data contain no linear correlation evidence indicates the presence of substantial nonlinearity in a multiplicative rather than additive form further examination reveals that a generalized autoregressive conditional heteroskedasticity model can explain a large part of the nonlinearities for all five exchange rates copyright 1989 by the university of chicago

the empirical performance of the ecb s repo auctions evidence from aggregated and individual bidding data abstract we analyze the empirical performance of the ecb s fixed rate tenders by estimating bid functions using aggregated and individual bidding data the intention of the study is twofold first in view of the ecb s emphasis on the principle of equal treatment we employ the aggregated data to compare the bidding behavior of german and non german banks specifically we investigate banks overbidding and its response to opportunity cost and interest rate expectations second we use the individual bidding data of german banks and estimate panel data models to investigate the impact of a bank s type on its bidding the results indicate that large banks bid more informed or sophisticated than smaller banks with regard to interest rate expectations however there is no evidence for a size effect in banks overbidding behavior

bivariate garch estimation of the optimal commodity futures hedge six different commodities are examined using daily data over two futures contract periods cash and futures prices for all six commodities are found to be well described as martingales with near integrated garch innovations bivariate garch models of cash and futures prices are estimated for the same six commodities the optimal hedge ratio ohr is then calculated as a ratio of the conditional covariance between cash and futures to the conditional variance of futures the estimated ohrs reveal that the standard assumption of a time invariant ohr is inappropriate for each commodity the estimated ohr path appears non stationary which has important implications for hedging strategies

a new pearson type qmle for conditionally heteroscedastic models this article proposes a novel pearson type quasi maximum likelihood estimator qmle of garch p q models unlike the existing gaussian qmle laplacian qmle generalized non gaussian qmle or lad estimator our pearsonian qmle pqmle captures not just the heavy tailed but also the skewed innovations under strict stationarity and some weak moment conditions the strong consistency and asymptotic normality of the pqmle are obtained with no further efforts the pqmle can be applied to other conditionally heteroscedastic models a simulation study is carried out to assess the performance of the pqmle two applications to four major stock indexes and two exchange rates further highlight the importance of our new method heavy tailed and skewed innovations are often observed together in practice and the pqmle now gives us a systematic way to capture these two coexisting features

some relations between volatility and serial correlations in stock market returns this article explores the relation between serial correlation and volatility for several different stock return series at daily and weekly frequencies it is found that serial correlations are changing over time and are related to stock return volatility an extension to the garch model is proposed and estimated revealing parameters consistent with other findings in this article copyright 1992 by university of chicago press

energy demand and supply in the developing world 1990 2020 three decades of explosive growth many recent scenarios of future world energy demand and supply assume a lower growth of energy demand in the developing world than has been the case in recent decades such scenarios are based on experience with declining energy intensities in the industrial world this paper suggests a more plausible scenario in which energy demands in the developing world continue to double every decade new technologies and improvements in efficiency will continue to lower the real cost of energy services driving an expansion of these services to new consumers whose consumption has been limited by high prices low incomes and administrative induced constraints given initial low consumption levels and the income elastic nature of most energy services particularly transport even modest rates of economic growth will induce large increases in demand the availability of energy supplies will not constrain this surge rapid growth will create trade environmental and financial issues but over the long run these can be managed through appropriate policies and technological progress

alternative estimators for factor garch models a monte carlo comparison this paper proposes four estimators for factor garch models two stage univariate garch 2sue two stage quasi maximum likelihood 2sml quasi maximum likelihood with known factor weights rmle quasi maximum likelihood with unknown factor weights mle a monte carlo study is designed for bivariate one factor garch models to examine the finite sample properties results are presented for biases ratios of standard errors to standard deviations ratios of variances coverage of confidence intervals effects of misspecified factor weights and finite sample properties of the 2sue for factor garch in mean models

volatility spillovers in east european black market exchange rates abstract this paper tests the efficiency of dollar exchange rate black markets for the currencies of six formerly socialist countries of eastern europe under conditions of imperfect information high transaction costs and pronounced turbulence due to political and economic crisis and reform we find evidence of volatility spillovers in conditional mean affecting only the markets for the bulgarian lev and rumanian lei and limited evidence of volatility spillovers in conditional variance which imply the possibility of some policy coordination emanating from the soviet union nevertheless on balance our results lend broad support to the efficiency of exchange rate black markets and to previous results concerning floating exchange rate systems in general

estimating oil price value at risk using the historical simulation approach abstract in this paper we propose using value at risk var for oil price risk quantification var provides an estimation for the maximum oil price change associated with a likelihood level and can be used for designing risk management strategies we analyse three var calculation methods the historical simulation standard approach the historical simulation with arma forecasts hsaf approach developed in this paper and the variance covariance method based on autoregressive conditional heteroskedasticity models forecasts the results obtained indicate that hsaf methodology provides a flexible var quantification which fits the continuous oil price movements well and provides an efficient risk quantification

domestic monetary transfers and the inland bill of exchange markets in spain 1775 1885 abstract this article studies the monetary transfers system that was created by the short term inland bill of exchange markets for decades this system was the most practical way of channeling the growing volume of transfers which were taking place as a consequence of the growth of the spanish economy this analysis argues that between 1775 and 1885 the markets involved in this activity became progressively more efficient due largely to the multilateralization of the payment system this situation lasted longer in spain than in the rest of europe since spanish banking was initially slower to develop using univariate and multivariate garch models it was possible to conclude that the inland bill of exchange markets constituted an essential monetary instrument and one that faithfully reflects the integration of monetary markets in spain

the econometric analysis of models with risk terms summary in this paper we have attempted to provide an integrated approach to the estimation of models with risk terms it was argued that there exist orthogonality conditions between variables in the information set and higher order moments of the unanticipated variable density these could be exploited to provide consistent estimators of the parameters associated with the risk term specifically it was recommended that an iv estimator should be applied with instruments constructed from the information set four existing methods commonly used to estimate models with risk terms are examined and applications of the techniques are made to the estimation of the risk term in the us c exchange market and the effects of price uncertainty upon production

bidder behavior in multiunit auctions evidence from swedish treasury auctions we analyze a unique data set on multiunit auctions which contains the actual demand schedules of the bidders as well as the auction awards in over 400 swedish treasury auctions first we document that bidders vary their prices bid dispersion and the quantity demanded in response to increased uncertainty at the time of bidding second we find that bid shading can be explained by a winner s curse driven model in which each bidder submits only one bid despite the fact that the bidders in our data set use much richer bidding strategies third we explore the extent to which the received theories of multiunit auctions are able to offer insights into the bidder behavior we observe our empirical evidence is consistent with some of the predictions of the models of auctions that emphasize private information the winner s curse and the champion s plague while the models of multiunit auctions serve as useful guideposts our empirical findings also point to several new areas of research in multiunit auctions

uncertainty and the choice of trade policy in oligopolistic industries this paper investigates the design of trade policies in an uncertain world governments in each of two countries select between direct quantity controls and subsidies in an attempt to shift profits in favour of domestic imperfectly competitive firms the equilibrium of this bilateral policy game depends critically on the variability of the environment in a world of certainty both governments would choose to regulate the behaviour of their firms through direct quantity controls with a sufficient amount of uncertainty both governments regulate their firms through subsidies this result reflects an important tradeoff between the strategic advantages of direct quantity controls and flexibility gained by the use of subsidies

dynamic programming approach for valuing options in the garch model in this paper we develop an efficient algorithm to value options under discrete time garch processes we propose a procedure based on dynamic programming coupled with piecewise polynomial approximation to compute the value of a given option at all observation dates and levels of the state vector the method can be used for the large garch family of models based on gaussian innovations and may accommodate all low dimensional european as well as american derivatives numerical implementations show that this method competes very advantageously with other available valuation methods

correlated arch corrarch modelling the time varying conditional correlation between financial asset returns abstract although the time variation of the conditional correlations of asset returns is a well established stylized fact and of crucial importance for efficient financial decisions there is no explicit general model available for its estimation and forecasting in this paper we propose a bivariate garch covariance structure in which conditional variances can follow any garch type process while conditional correlation is generated by an explicit discrete time stochastic process the corrarch process a high order corrarch can parsimoniously be represented by a corgarch process the model successfully generates the reported stylized facts establishes an autocorrelation structure for correlations and thus provides an explicit framework for out of sample forecasting we provide empirical evidence from the g7 stock market indexes

threshold arch models and asymmetries in volatility this paper attempts to enlarge the class of threshold heteroscedastic models tarch introduced by zakoian 1991a we show that it is possible to relax the positivity constraints on the parameters of the conditional variance unconstrained models provide a greater generality of the paths allowing for nonlinearities in the volatility cyclical behaviour is permitted as well as different relative impacts of positive and negative shocks on volatility depending on their size we give empirical evidence using french stock returns

testing for autocorrelation using a modified box pierce q test this article investigates the finite sample performance of a modified box pierce q statistic q for testing that financial time series are uncorrelated without assuming statistical independence the finite sample rejection probabilities of the q test under the null and its power are examined in experiments using time series generated by an ma 1 process where the errors are generated by a garch 1 1 model and by a long memory stochastic volatility model the tests are applied to daily currency returns

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

value at risk for long and short trading positions in this paper we model value at risk var for daily stock index returns using a collection of parametric models of the arch family based on the skewed student distribution we show that models that rely on a symmetric density distribution for the error term underperform with respect to skewed density models when the left and right tails of the distribution of returns must be modelled thus var for traders having both long and short positions is not adequately modelled using usual normal or student distributions we suggest using an aparch model based on the skewed student distribution to fully take into account the fat left and right tails of the returns distribution this allows for an adequate modelling of large returns defined on long and short trading positions the performances of all models are assessed on daily data for the cac40 dax nasdaq nikkei and smi stock indexes we also compute the expected short fall and the average multiple of tail event to risk measure for the new model

bioeconomic diversity dynamics of a marine ecosystem this paper models the bio economic diversity dynamics of a marine ecosystem made up by its entire commercial fish species and from the fitted model obtains a quantitative measure of its resilienc

a lagrange multiplier test for garch models abstract this paper extends the lagrange multiplier lm test to testing noise disturbances against garch disturbances in the linear regression model the resulting lm test for the garch alternative is identical to the lm test for an arch alternative

time varying risk premium further evidence in agricultural futures markets research has provided mixed results regarding the presence of a time varying risk premium in agricultural futures markets in this article we test for the presence of a time varying risk premium focusing on the properties of the underlying data our results show that accounting for the structural break in the 1970s plays a key role in the findings in contrast to recent research we find only limited evidence of time varying risk premium for a two month horizon the corn soybean meal and hog markets show no signs of a risk premium while very weak support for a time varying premium emerges in live cattle for the four month horizon no evidence of a time varying risk premium appears for any of the markets

arch and bilinearity as competing models for nonlinear dependence in this article we consider whether the wide acceptance of autoregressive conditional heteroscedasticity arch models may be at the expense of other nonlinear processes such as bilinear models we first propose a joint test for arch and bilinearity a nonnested test is then suggested to determine whether nonlinear dependence should be attributed to arch or bilinearity the tests are then applied to three series when generalized arch garch models are taken as the null hypothesis we fail to reject it for all the data series when bilinearity is taken as the null however it is rejected in two cases moreover an out of sample forecasting exercise shows that the garch model is superior the results therefore indicate a strong preference for the garch model

bid shading and risk aversion in multi unit auctions with many bidders abstract we extend the analysis of optimal price taking bidding in multi unit auctions to allow for risk aversion and a continuous random stop out price we show that in a discriminatory auction risk averse bidders should bid less aggressively than risk neutral bidders however bid shading is optimal at each price which implies with complete certainty inefficient trade this is in sharp contrast to competitive auctions where truthful bidding is optimal even under risk aversion

common persistence in conditional variances since the introduction of the autoregressive conditional heteroskedastic arch model in engle 1982 numerous applications of this modeling strategy have already appeared a common finding in many of these studies with high frequency financial or monetary data concerns the presence of an approximate unit root in the autoregressive polynomial in the univariate time series representation for the conditional second order moments of the process as in the so called integrated generalized arch igarch class of models proposed in engle and bollerslev 1986 in the igarch models shocks to the conditional variance are persistent in the sense that they remain important for forecasts of all horizons this idea is readily extended to a multivariate framework even though many time series may exhibit persistence in variance it is likely that several different variables share the same common long run component in that situation the variables are naturally defined to be co persistent in variance and the co persistent linear combination is interpretable as a long run relationship conditions for co persistence to occur in the multivariate linear garch model are presented these conditions parallel the conditions for linear co integration in the mean as developed by engle and granger 1987 the presence of co persistence has important implications for asset pricing relationships and in optimal portfolio allocation decisions an empirical example relating to the time series properties of nominal u s dollar exchange rates for the deutschemark and the british pound provides a simple illustration of the ideas

interest rate and liquidity risk management and the european money supply process abstract the monetary setup of the european central bank ecb centers around short term securities repurchase agreements repos which ensure the flexibility of its money market management however a flexible repo based monetary policy exposes banks to both interest rate risk and liquidity risk this paper investigates the consequences for the money supply process and the conduct of monetary policy we develop a loan supply model with maturity transformation and show how banks respond when future monetary policy is expected to become tighter or more uncertain our results also shed light on the rationale behind the use of different pricing rules in the ecb s repo auctions

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

the stochastic volatility in mean model empirical evidence from international stock markets in this paper we present an exact maximum likelihood treatment for the estimation of a stochastic volatility in mean svm model based on monte carlo simulation methods the svm model incorporates the unobserved volatility as an explanatory variable in the mean equation the same extension is developed elsewhere for autoregressive conditional heteroscedastic arch models known as the arch in mean arch m model the estimation of arch models is relatively easy compared with that of the stochastic volatility sv model however efficient monte carlo simulation methods for sv models have been developed to overcome some of these problems the details of modifications required for estimating the volatility in mean effect are presented in this paper together with a monte carlo study to investigate the finite sample properties of the svm estimators taking these developments of estimation methods into account we regard sv and svm models as practical alternatives to their arch counterparts and therefore it is of interest to study and compare the two classes of volatility models we present an empirical study of the intertemporal relationship between stock index returns and their volatility for the united kingdom the united states and japan this phenomenon has been discussed in the financial economic literature but has proved hard to find empirically we provide evidence of a negative but weak relationship between returns and contemporaneous volatility which is indirect evidence of a positive relation between the expected components of the return and the volatility process copyright 2002 john wiley sons ltd

cross country differences in monetary policy execution and money market rates volatility abstract volatility patterns in overnight interest rates display differences across industrial countries that existing models designed to replicate the features of individual countries markets cannot account for this paper presents an equilibrium model of the overnight interbank market that matches cross country differences in patterns in interest volatility by incorporating differences in how central banks manage liquidity in response to shocks our model is consistent with central banks practice of rationing access to marginal facilities when the objective of stabilizing short term interest rates conflicts with another high frequency objective such as an exchange rate target

the nobel memorial prize for robert f engle work is a fine example of best practice applied time series econometrics he identifies important dynamic economic phenomena formulates precise and interesting questions about those phenomena constructs sophisticated yet simple econometric models for measurement and testing and consistently obtains results of widespread substantive interest in the scientific policy and financial communities although many of engle s contributions are fundamental i will focus largely on the two most important the theory and application of cointegration and the theory and application of dynamic volatility models moreover i will discuss much more extensively engle s volatility models and their role in financial econometrics for several reasons first engle s nobel citation was explicitly for methods of analyzing economic time series with time varying volatility arch whereas granger s was for for methods of analyzing economic time series with common trends cointegration second the credit for

autoregressive conditional heteroscedasticity in commodity spot prices muth s 1961 rational expectations model of commodity markets implies that inventory carryover creates arch processes in prices the model also indicates that the expected price variance is an explanatory variable in price regressions hypotheses were tested on price data of twenty commodities using a variation of engle et al 1987 arch m technique an arch process was found in storable and not in non storable commodity data as expected however changes in expected price variance have no significant impact on price copyright 2001 john wiley sons ltd

a conditional variance model for daily deviations of an exchange rate a model for the distribution of daily deviations of an exchange rate is suggested the distribution is gaussian with a variance that depends on previous deviations the model is applied to the exchange rate of the u s dollar to special drawing rights

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

estimates of the demand for energy using cross country consumption data using cross country consumption data we estimate a system of demand equations in a piecewise manner to investigate whether price and expenditure elasticities for energy differ between broad groups of countries the empirical results reject the assumption of constant parameters across regimes of poor and rich countries the derived elasticities suggest that the own price elasticity for energy is higher in poor than in rich countries we find no evidence for the commonly held view that expenditure elasticities for energy decline with income

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

financing the energy sector in developing countries context and overview abstract traditional business as usual financing methods will no longer be adequate to meet the unprecedented demands for capital to finance energy sector expansion in the developing countries in recognition many countries are opening up their power sectors to private investment initially through the establishment of independent power projects but in some cases through sector privatization project financing has many advantages but further sectoral reorganization including tariff reform will be needed to attract resources on the scale required especially from domestic investors in oil and gas in contrast to power private capital from the international oil companies has always played a major role in the developing countries however sharply increasing investment requirements require a growing role for external finance there should in principle be no shortage of investible funds to finance energy sector expansion in developing countries so long as host countries establish conditions which are attractive to private investors the augmented role of private finance requires a continuing if different role for the public sector in both host countries and official aid agencies

testing for arch in the presence of additive outliers in this paper we investigate the properties of the lagrange multiplier lm test for autoregressive conditional heteroskedasticity arch and generalized arch garch in the presence of additive outliers ao s we show analytically that both the asymptotic size and power are adversely affected if ao s are neglected the test rejects the null hypothesis of homoskedasticity too often when it is in fact true while the test has difficulty detecting genuine garch effects several monte carlo experiments show that these phenomena occur in small samples as well we design and implement a robust test which has better size and power properties than the conventional test in the presence of ao s applications to the french industrial production series and weekly returns of the spanish peseta us dollar exchange rate reveal that sometimes apparent garch effects may be due to only a small number of outliers and conversely that genuine garch effects can be masked by outliers

a multi country study of power arch models and national stock market returns abstract ding et al 1993 ding z granger c w j engle r f 1993 a long memory property of stock market returns and a new model journal of empirical finance 1 83 106 suggested a model which extends the arch family of models for analyzing a wider class of power transformations than simply taking the absolute value or squaring the data as in the conventional conditional heteroscedastic models this paper analyzes the applicability of these power arch parch models to national stock market returns for 10 countries plus a world index we find the parch model to be generally applicable once garch and leverage effects are taken into consideration in addition we also find that the optimal power transformation is remarkably similar across countries

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

rolling sampled parameters of arch and levy stable models in this paper an asymmetric autoregressive conditional heteroskedasticity arch model and a levy stable distribution are applied to some well known financial indices dax30 ftse20 ftse100 and sp500 using a rolling sample of constant size in order to investigate whether the values of the estimated parameters of the models change over time although there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time the arch model adequately forecasts the one day ahead volatility a simulation study is run to investigate whether the time variant attitude holds in the case of a generated arch data process revealing that even in that case the rolling sampled parameters are time varying

examining the relationship between stock return volatility and trading volume new evidence from an emerging economy using daily stock return data for individual stocks from an emerging economy this article examines the relationship between return volatility and trading volume under the theoretical postulate of the mixture of distributions hypothesis the results suggest that the contemporaneous trading volume as a proxy for latent information arrival to the market did not contribute to the removal of significant arch or generalized autoregressive conditional heteroscedasticity effects that are found in stocks at the first stage of the investigation the same holds for the lagged volume except for one case this perhaps suggests that the trading volume contemporaneous or lagged is not adequately conveying information to induce traders views of the desirability of trade and therefore points to the need for searching for other micro and macro variables to be used as potential proxy for information arrival to the stock market of the emerging economy

the repo auctions of the european central bank and the vanishing quota puzzle until june 2000 the european central bank ecb used fixed rate tenders for its weekly repo auctions a switch to variable rate tenders became necessary due to massive overbidding by banks in this paper we introduce a stylized game among banks to investigate this overbidding phenomenon our results confirm the weakness of the fixed rate tender format and indicate that the ecb s liquidity management has significantly improved since the switch to the variable rate system yet recent episodes of rate cut expectations suggest that the ecb s practice of setting a minimum bid rate should be abandoned in favor of a more symmetric interest rate target

non stationarity in garch models a bayesian analysis textabstractfirst the non stationarity properties of the conditional variances in the garch 1 1 model are analysed using the concept of infinite persistence of shocks given a time sequence of probabilities for increasing decreasing conditional variances a theoretical formula for quasi strict non stationarity is defined the resulting conditions for the garch 1 1 model are shown to differ from the weak stationarity conditions mainly used in the literature bayesian statistical analysis using monte carlo integration is applied to analyse both stationarity concepts for the conditional variances of the us 3 month treasury bill rate interest rates are known for their weakly non stationary conditional variances but using a quasi strict stationarity measure it is shown that the conditional variances are likely to be stationary second the level of the treasury bill rate is analysed for non stationarity using bayesian unit root methods the disturbances of the garch model for the treasury bill rate are t distributed it is shown that the unit root parameter is negatively correlated with the degrees of freedom parameter imposing normally distributed disturbances leads therefore to underestimation of the non stationarity in the level of the treasury bill rate

term structure of interest rates in the singapore asian dollar market this paper investigates empirically the term structure of interest rates in the singapore asian dollar market we consider extended versions of the arch m model of engle lilien and robins 1987 the extended models permit autocorrelation skewness and leptokurtosis in the residuals the robustness of the empirical tests with respect to alternative specifications of the arch process is examined it turns out that there is significant time varying term premium and this conclusion is independent of the hypothesized arch model

stock return process and expected depreciation over the asian financial crisis the asian financial crisis has been characterized by unstable stock and foreign exchange markets in asia since july 1997 this paper postulates that expected depreciation helps to predict stock market volatility over the turmoil period using taiwan daily data as an example the estimated arch 3 m model documents significantly a negative depreciation effect with no heteroscedasticity in the stock return process suggesting that the expected depreciation is a cause of the changing variance the evidence further shows that the stock market volatility has increased during the period of the asian financial crisis 1997 1998 but the corresponding time varying risk premium has remained unchanged

recent theoretical results for time series models with garch errors this paper provides a review of some recent theoretical results for time series models with garch errors and is directed towards practitioners starting with the simple arch model and proceeding to the garch model some results for stationary and nonstationary arma garch are summarized various new arch type models including double threshold arch and garch arfima garch charma and vector arma garch are also reviewed copyright 2002 by blackwell publishers ltd

monetary policy transmission with interbank market fragmentation this paper shows how interbank market fragmentation disrupts the transmission of monetary policy fragmentation is the fact that banks depending on their country of location have different probabilities of default on their interbank borrowings once fragmentation is introduced into standard theoretical models of monetary policy implementation excess liquidity arises endogenously this leads short term interest rates to depart from the central bank policy rates using data on monetary policy operations i show that this mechanism has been at work in the euro area since 2008 the model is used to analyze conventional and unconventional monetary policy measures

seminonparametric estimation of conditionally constrained heterogeneous processes asset pricing applications the overidentifying restrictions of the intertemporal capital asset pricing model are usually rejected when tested using data on consumption growth and asset returns particu larly when additively separable constant relative risk utility is attributed to the representa tive agent this article investigates the extent to which specification error can explain these rejections the empirical strategy is limited information maximum likelihood in conjunc tion with seminonparametric expanding parameter space representations for both the law of motion and utility we find that consumption growth and asset returns display conditional heterogeneity but this fact does not account for rejection of the overidentifying restrictions as might be anticipated from the work of hansen singleton and others using generalized method of moments methods we also find that expansion of the parameter space in the direction of nonseparable utility causes the overidentifying restrictions to be accepted our estimation strategy provides information on the manner in which the restrictions distort the law of motion in particular imposition of additively separable constant relative risk aversion utility causes the conditional variance of consumption growth to be overpredicted the conditional covariance of asset returns with consumption growth to be overpredicted and an equity premium imposition of nonseparable seminon parametric utility causes distortion in these same directions though the distortions are much smaller which is consistent with the outcomes of the tests of the restrictions

stock market volatility and the crash of 1987 evidence from six emerging markets abstract this paper studies volatility risk premia and the persistence of volatility in six emerging stock markets before and after the 1987 stock market crash the empirical investigation is conducted by means of the garch in the mean model garch m and monthly data from argentina greece india mexico thailand and zimbabwe between january of 1976 and august of 1994 results indicate changes in the arch parameter risk premia and persistence of volatility before and after the 1987 crash but these noted changes are not uniform and depend upon the individual markets factors other than the 1987 crash may also be responsible for the changes

hedging winner s curse with multiple bids evidence from the portuguese treasury bill auction auctions of government securities typically permit bidders to enter multiple price quantity bids despite the widespread adoption of this institutional feature and its use by bidders the motivations behind its use and its effects on auction outcomes are not well understood theoretically and have been little explored empirically this paper proposes that bidders use multiple bids to adjust for winner s curse by spreading her bids a bidder aligns her outcome more closely to the aggregate outcome of the auction this hypothesis is tested using bidding data from treasury bill auctions in portugal i find that ceteris paribus a bidder submits a greater number of bids and disperses prices on these bids more widely when there is a greater potential for winner s curse in particular both these measures of bid spreading increase with the volatility of market interest rates and the expected number of participating well informed bidders

long run income and price elasticities of demand for colombian nontraditional exports a multivariate cointegration framework a long run income and price elasticities of demand is estimated for colombian nontraditional exports through a multivariate cointegration analysis based on the combination of cointegration and exogeneity concepts and the inclusion of the complete dynamic system the paper shows the existence of a long run relationship among nontraditional exports relative price and foreign demand and higher long run elasticities than those provided by the long run cointegration vector coefficients that are usually reported in the trade literature

the property liability insurance cycle a comparison of alternative models the objective of this paper is to compare alternative models of insurance pricing as theories of the property liability underwriting cycle the existing literature has focused on comparing two models the financial pricing and capacity constraint models however these are not the only relevant models we show that six alternative models imply the same general form of the pricing equation we apply the model to data on stock property liability insurers for the period 1935 1997 we find that the actuarial model and the capacity constraint hypothesis are the only theoretical models that are consistent with the data

bayesian inference methods for univariate and multivariate garch models a survey this survey reviews the existing literature on the most relevant bayesian inference methods for univariate and multivariate garch models the advantages and drawbacks of each procedure are outlined as well as the advantages of the bayesian approach versus classical procedures the paper makes emphasis on recent bayesian non parametric approaches for garch models that avoid imposing arbitrary parametric distributional assumptions these novel approaches implicitly assume infinite mixture of gaussian distributions on the standardized returns which have been shown to be more flexible and describe better the uncertainty about future volatilities finally the survey presents an illustration using real data to show the flexibility and usefulness of the non parametric approach

exchange rate volatility and volatility asymmetries an application to finding a natural dollar currency based on six daily spot nominal exchange rate returns denominated in the us dollar viz a viz uk pound japanese yen swiss franc canadian dollar australian dollar and singapore dollar this paper tries to find a natural dollar currency by comparing the linear nonlinear dynamics in the conditional variance of these bilateral exchange rate returns time varying volatility vs asymmetries the characteristics of the unconditional distribution of the fx returns justified the use of the garch class of models of conditional volatility strong time varying symmetric effects are apparent in all the series examined especially in the australian dollar further asymmetric effects in unexpected appreciations and depreciations of currencies are examined based on the gjr model the st garch model and the anst garch model which encompasses several asymmetric models the estimates of asymmetric models show weak evidence of asymmetries in most of the currencies except in the japanese yen and uk pound further find

optimal dynamic hedging portfolios and the currency composition of external debt abstract we present a model which shows that the currency composition of a country s external debt can serve as a hedging instrument against changes in exchange rates and commodity prices because our model permits the second moments to change through time we get a sequence of optimal dynamic hedging portfolios which can be estimated with a multivariate generalized autoregressive conditional heteroskedasticity garch model to illustrate the usefulness of the technique we apply it to indonesia and it is found as expected that indonesia s optimal debt portfolio consists of a much larger proportion of us dollars and a much smaller proportion of japanese yen than they have in their current debt portoflio

modeling regime dependent agricultural commodity price volatilities in stark contrast to financial markets relatively little attention has been given to modeling agricultural commodity price volatility in recent years numerous methodologies with various strengths have been proposed for modeling price volatility in financial markets we propose using a mixture of normals with unique garch processes in each component for modeling agricultural commodity prices while a normal mixture model is quite flexible and allows for time varying skewness and kurtosis its biggest strength is that each component can be viewed as a different market regime and thus estimated parameters are more readily interpreted we apply the proposed model to ten different agricultural commodity weekly cash prices both in sample fit and out of sample forecasting tests confirm that the two state nm garch approach performs better than the traditional normal garch model a significant and state dependent inverse leverage effect is detected only for pork in the regime where the price is expected to drop indicating the volatility in this regime tends to increase more following a realized price rise than a realized price drop

banks demand for reserves when future monetary policy is uncertain abstract the extensive use of revolving securities repurchase agreements has increased the flexibility of the money market management of many european central banks using an extended reserve management model this paper shows that a flexible central bank can influence money market conditions just by being more or less vague or determined about its future course of monetary policy employing arch in mean models for german money market rates confirms that more uncertainty reduces banks demand for borrowed reserves and thereby leads to decreasing interest rates in the interbank money market

generalized instrumental variables estimation of autoregressive conditional heteroskedastic models abstract this paper considers an alternative to maximum likelihood ml estimation of the autoregressive conditional heteroskedastic arch model introduced in engle 1982 specifically the analysis demonstrates that hansen s 1982 generalized method of moments gmm procedure can be applied for estimation of arch models as an illustration we compare the results from ml estimation and gmm estimation of engle and kraft s 1983 arch model of u s inflation

how auctions reveal information a case study on german repo rates securities repurchase agreements repos have become the bundesbank s most important tool for its ongoing money market management and the control of the monetary base in the fall of 1988 the bundesbank changed the applied auction rule in order to prevent banks from submitting exaggerated bids focusing on the information content of a resulting repo rate this paper investigates how german money market rates react to auction results evidence will be found that the response of the money market to a new repo rate reflects the applied auction rule copyright 1997 by ohio state university press

strategic trade policy abstract i consider a trade policy game in which the choice of policy subsidy or quota and time of implementation before commit or after delay observing the random demand intercept is endogenously determined each country has four possible options cq cs ds and dq where cq denotes a commitment to a quota and the other options are similarly labeled for the special case of an international duopoly countries prefer quotas to subsidies cq is chosen if noise is small and dq if noise is large also interesting is that quotas in the dq regime coincide with firms desired exports

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland