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

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

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

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

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

some models for estimating technical and scale inefficiencies in data envelopment analysis in management contexts mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best in this capacity mathematical programming serves as a planning aid to management data envelopment analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments however they may have been planned or executed mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities the ccr ratio form introduced by charnes cooper and rhodes as part of their data envelopment analysis approach comprehends both technical and scale inefficiencies via the optimal value of the ratio form as obtained directly from the data without requiring a priori specification of weights and or explicit delineation of assumed functional forms of relations between inputs and outputs a separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of dea directly on observational data technical inefficiencies are identified with failures to achieve best possible output levels and or usage of excessive amounts of inputs methods for identifying and correcting the magnitudes of these inefficiencies as supplied in prior work are illustrated in the present paper a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing constant or decreasing returns to scale in multiple input and multiple output situations the results are discussed and related not only to classical single output economics but also to more modern versions of economics which are identified with contestable market theories

inference in nonlinear econometric models with structural change this paper extends the classical test for structural change in linear regression models see chow 1960 to a wide variety of nonlinear models estimated by a variety of different procedures wald lagrange multiplier like and likelihood ratio like test statistics are introduced the results allow for heterogeneity and temporal dependence of the observations in the process of developing the above tests the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models

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

additive efficiency decomposition in two stage dea kao and hwang 2008 kao c hwang s n 2008 efficiency decomposition in two stage data envelopment analysis an application to non life insurance companies in taiwan european journal of operational research 185 1 418 429 develop a data envelopment analysis dea approach for measuring efficiency of decision processes which can be divided into two stages the first stage uses inputs to generate outputs which become the inputs to the second stage the first stage outputs are referred to as intermediate measures the second stage then uses these intermediate measures to produce outputs kao and huang represent the efficiency of the overall process as the product of the efficiencies of the two stages a major limitation of this model is its applicability to only constant returns to scale crs situations the current paper develops an additive efficiency decomposition approach wherein the overall efficiency is expressed as a weighted sum of the efficiencies of the individual stages this approach can be applied under both crs and variable returns to scale vrs assumptions the case of taiwanese non life insurance companies is revisited using this newly developed approach

on becoming more flexible exchange rate regimes in latin america and the caribbean abstract this paper examines the shift from fixed to more flexible exchange rate regimes among countries in latin america and the caribbean in contrast to most traditional approaches the one followed here recognizes that fixed rates can be and often are adjusted but argues that policy makers incur a political cost from devaluation at the same time flexible exchange rates even managed ones may be very volatile with persistent misalignment a stylized model of regime choice is developed based on the perceived losses from exchange rate misalignment incurred under fixed versus more flexible regimes the model is estimated for a sample of 24 countries over the period 1978 1992 and empirical results are quite supportive misalignments proxied by current account deficits and moderate to high rates of inflation were associated with a move to more flexible rates during 1978 1986 misalignment indicators appear to have mattered less during 1987 1992 however there appears to have been a major reduction in the perceived difficulty of managing flexible rates during this period the paper then cautions against attributing differences in economic growth between groups of countries to their exchange regime the central point here is that the endogeneity of regime choice introduces selection biases into the samples of countries with fixed and with more flexible exchange regimes

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

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

the mirage of fixed exchange rates this paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets contrary to popular wisdom industrialized country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack but if their commitment to use those resources lacks credibility with markets the costs to the broader economy of defending an exchange rate peg can be very high the dynamic interplay between credibility and commitment is illustrated by the 1992 swedish and british crises and the 1994 95 mexican collapse we also discuss the small number of successful fixers

multi period efficiency and malmquist productivity index in two stage production systems abstract conventional two stage data envelopment analysis dea models measure the overall performance of a production system composed of two stages processes in a specified period of time where variations in different periods are ignored this paper takes the operations of individual periods into account to develop a multi period two stage dea model which is able to measure the overall and period efficiencies at the same time with the former expressed as a weighted average of the latter since the efficiency of a two stage system in a period is the product of the two process efficiencies the overall efficiency of a decision making unit dmu in the specified period of time can be decomposed into the process efficiency of each period based on this decomposition the sources of inefficiency in a dmu can be identified the efficiencies measured from the model can also be used to calculate a common weight global malmquist productivity index mpi between two periods in that the overall mpi is the product of the two process mpis the non life insurance industry in taiwan is used to verify the proposed model and to explain why some companies performed unsatisfactorily in the specified period of time

exchange rate regimes in developing and emerging economies and the incidence of imf programs summary the global economic crisis will compel many countries to revise key economic policies including their exchange rate regime the international monetary fund will have significant influence on their choices and has exhibited a bias against intermediate regimes we examine the link between exchange rate regimes and imf program use and find no evidence that countries with intermediate exchange rate regimes require more frequent imf assistance rather they appear somewhat less dependent especially when compared to fixed exchange rates our results suggest that intermediate regimes should remain a viable and possibly desirable exchange rate choice for some countries

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

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

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

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

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

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

exchange rate regimes and inflation only hard pegs make a difference abstract using data from a large sample of developing countries from 1985 to 2001 we confirm that hard pegs currency boards or a shared currency reduce inflation and money growth there is no evidence that soft pegs confer any monetary discipline after other factors are controlled for inflation triggers regime switches under hard pegs monetary growth is unaffected by fiscal deficits or by inflation shocks under soft pegs as under floats increased fiscal deficits and positive inflation shocks are associated with higher monetary growth the apparently slower per capita output growth under hard pegs is explained by their geographical distribution jel classification f41

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

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

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

explaining the transition between exchange rate regimes this paper studies the transition between exchange rate regimes using a markov chain model with time varying transition probabilities the probabilities are parameterized as nonlinear functions of variables suggested by the currency crisis and optimal currency area literature results using annual data indicate that inflation and to a lesser extent output growth and trade openness help explain the exchange rate regime transition dynamics

the dynamics of exchange rate regimes fixes floats and flips the impermanence of fixed exchange rates has become a stylized fact in international finance the combination of the mirage view that pegs do not really peg with the fear of floating view that floats do not really float generates the conclusion that exchange rate regimes are in practice unimportant for the behavior of the exchange rate this is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance recent studies however show that the exchange rate regime matters this can be understood by considering the dynamics of exchange rate regimes we demonstrate that the mirage view is somewhat misleading and incomplete pegs frequently break but many do last also there is a high degree of flipping that is the re formation of pegs that have broken thus a fixed exchange rate today is a good predictor that one will exist in the future we also investigate the quantitative effect of fixed exchange rates while the fear of floating view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates both today and in the future 2007 elsevier b v all rights reserved

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

predicting currency crises abstract in recent years a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises most notably kaminsky lizondo and reinhart 1998 this paper evaluates the klr approach to anticipating currency crises and develops and tests an alternative first we try to answer the question if we had been using the klr model in late 1996 how well armed would we have been to predict the asia crisis second we analyze a more general probit based model of predicting currency crises in the process we test several basic assumptions underlying the indicators approach

the international monetary system in the last and next 20 years the last two decades have seen far reaching changes in the structure of the international monetary system europe moved from the european monetary system to the euro china adopted a dollar peg and then moved to a basket band and crawl in 2005 emerging markets passed through a series of crises leading some to adopt regimes of greater exchange rate flexibility and others to rethink the pace of capital account liberalization interpreting these developments is no easy task some observers conclude that recent trends are confirmation of the bipolar view that intermediate exchange rate arrangements are disappearing while members of the fear of floating school conclude precisely the opposite we show that the two views can be reconciled if one distinguishes countries by their stage of economic and financial development among the advanced countries intermediate regimes have essentially disappeared this supports the bipolar view for the group of countries for which it was first developed within this subgroup the dominant movement has been toward hard pegs reflecting monetary unification in europe while emerging markets have also seen a decline in the prevalence of intermediate arrangements these regimes still account for more than a third of the relevant subsample here the majority of the evacuees have moved to floats rather than fixes reflecting the absence of emu like arrangements in other parts of the world among developing countries the prevalence of intermediate regimes has again declined but less dramatically where these regimes accounted for two thirds of the developing country subsample in 1990 they account for a bit more than half of that subsample today as with emerging markets the majority of those abandoning the middle have moved to floats rather than hard pegs the gradual nature of these trends does not suggest that intermediate regimes will disappear outside the advanced countries anytime soon barry eichengreen and raul razo garcia

revenue based capacity utilisation measures and decomposition the case of danish north sea trawlers in fisheries capacity analysis has largely been limited to measuring physical capacity defined as the maximum amount of output that can be produced per unit of time given existing plant and equipment and unrestricted availability of variable inputs an economic measure of capacity can be defined as the maximum revenue attainable for the given fixed inputs using relevant outputs and output prices this paper examines these two approaches to capacity by applying data envelopment analysis to physical and economic input output data for danish north sea trawlers the economic and physical measures are compared and contrasted using correlation analysis an innovative analysis into the composition of possible revenue increments is also presented and reasons for economic inefficiency of vessels are identified

analysis of exchange rate target zones using a limited dependent rational expectations model with jumps this article examines the exchange rate determination in a target zone regime when the bounds can be fixed for an extended period but are subject to occasional jumps in this case the behavior of the endogenous variable is affected by the agents expectations about both the occurrence and the size of the jump empirical results using data for the franc mark exchange rate provide support for the nonlinear model with time varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis