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

a note on discount rate policy and the variability of discount window borrowing abstract the purpose of this note is to evaluate the appropriate discount rate policy rules consistent with minimization of the variability of borrowing at the federal reserve discount window in the context of goodfriend s 1983 model of the bank borrowing decision it is demonstrated that either a penalty rate or a subsidy rate policy will produce minimized variability of borrowing so long as the subsidy rate adjusts point for point to changes in the value of the federal funds rate these policy rules are compatible with a policy procedure designed to target borrowed or non borrowed reserves if the fed does not adhere to one of these specific rules minimization of borrowing variability requires an open market procedure in which the fed pegs the federal funds rate

the federal funds market under bank deregulation the introduction of competitive interest rates on deposits is shown to effect the optimal decisions of banks by altering their optimal forecast of the federal funds rate the movement toward co mpetitive deposit rates increases the size of the monetary base neces sary for the fed to maintain its deposit targets when deposits and the monetary base are substitutes in addition there is less uncertainty in the federal funds market under competitive deposit rates when deposits and the monetary base are substitutes and the source of uncertainty is not from the supply of deposits copyright 1987 by ohio state university press

discount window borrowing across federal reserve districts evidence under contemporaneous reserve accounting abstract in recent years bank borrowing at the discount window has been less reliably related to the spread between the federal funds rate and the discount rate complicating the implementation of the borrowed reserves targeting procedure of the federal reserve this paper investigates borrowing across federal reserve districts to see if there are significant differences in borrowing behavior across bank size and discount window administrations the results suggest that borrowing behavior does differ across districts that standard borrowing models are least satisfactory in explaining the borrowing of large banks and that borrowing behavior changed after the 1987 stock market crash the gains in explanatory power from disaggregation however are not large

the demand for borrowed reserves a switching regression model a microeconomic model of bank demand for borrowed reserves from the federal reserve is developed based upon constrained cost minimization the derived demand function was found to correspond to behavior appropriate to the unknown switchpoint switching regression problem when estimated parameters generally conformed to theoretical expectations the model was also tested for existence of switching regression behavior against a model similar to goldfeld and kane 12 significance exceeded 99 in all cases with the advent of reserve intermediate targeting it appears especially necessary to reinvestigate the behavior determining this important source of reserves with the advent of reserve intermediate targeting as of october 6 1979 it appears especially necessary to reinvestigate the behavior determining one source of these reserves borrowings from the discount window although the behavior of borrowed reserves has concerned researchers since the 1920s interest in the subject generally waned after 1970 the reason has much to do with the studies of polakoff 21 and goldfeld and kane 12 polakoff develops a structural model for discount window borrowing based upon the individual bank minimizing its costs among alternative borrowing sources adapting the seminal work of turner 29 goldfeld and kane extend and estimate polakoff s original model because of their well developed microeconomic theory seemingly accurate empirical adjustments and proxy variables and excellent all around empirical results goldfeld and kane s study is widely hailed as a leading study in the field of borrowed reserve demand evidence exists through studies such as keir 18 that the federal reserve continues to use this same basic model in this study a borrowed reserve demand function is derived using a constrained minimum cost setup included in the cost of discount window borrowing is an implicit cost function reflecting bank reluctance to borrow from the discount window caused by federal reserve surveillance the derived demand function found in section i conforms to behavior appropriate to a switching regression model in this case switching occurs dependent upon the size of the interest rate spread relative to an unknown switchpoint after making minor adjustments in section ii the model is estimated employing monthly data from 1955 78 these results and the tests for the existence of

recovering probability distributions from option prices this article derives underlying asset risk neutral probability distributions of european options on the s p 500 index nonparametric methods are used to choose probabilities that minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices alternative optimization specifications produce approximately the same implied distributions a new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed since the crash the risk neutral probability of a three four standard deviation decline in the index about 36 percent 46 percent over a year is about 10 100 times more likely than under the assumption of lognormality recently the increasing popularity of derivatives and some highly publicized failures to control risk have led to increased efforts to find reasonable methods to measure the sensitivity of large institutional derivatives portfolios to extreme events merely because such events are rare is not sufficient to ignore them since on the few occasions when they do occur significant amounts of money can change hands potentially wiping out profits accumulated over long prior periods a key assumption behind methods of estimation is the joint probability distribution of constituent underlying asset returns this has long been a concern of financial economists since probability assumptions are critical to much of their research during the last quarter century heretofore probability distributions of stock market returns have typically been estimated from historical time series unfortunately common hypotheses may not capture the probability of extreme events and the events of interest are rare or may not be present in the historical record even though they are clearly possible

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

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

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

administering the window abstract this paper presents a game theoretic model of nonprice rationing at the discount window it focuses on the federal reserve s use of frequency guidelines and harassment to deter excessive use of the discount window by banks the model investigates the role of the discount officer the effect of uncertainty and the credibility of threats used by the discount officer to deter excessive borrowing by banks

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

another look at yield spreads the role of liquidity liquidity plays an important role in explaining how banks determine their allocation of funds this paper examines whether this fact can explain yield spreads and the term structure of interest rates the paper models banks demand for liquidity in a manner similar to that used to study household need for liquidity namely by using a cash in advance type model the paper finds that the shadow price of the cash in advance constraint plays an important role in determining yield spreads the empirical part of the paper shows that the expectations hypothesis might be salvaged under the maintained hypothesis concerning the liquidity premium and risk premium

near integration bank reluctance and discount window borrowing abstract this study puts forth stationarity considerations in explaining the observed breakdown between aggregate discount window borrowing and the spread between the federal funds rate and the discount rate during the post 1987 period tests with biweekly data indicate stationarity for adjustment borrowing but cannot reject the unit root for the spread the goodfriend dutkowsky dynamic implicit cost formulation can accommodate the contrasting stationarity properties structural restrictions are compatible with stationary borrowing and a stationary or near integrated spread while empirical findings from the static model indicate greater bank reluctance to borrow over time the dynamic model gives considerably less support

cumulative prospect theory option returns and the variance premium the variance premium and the pricing of out of the money otm equity index options are major challenges to standard asset pricing models we develop a tractable equilibrium model with cumulative prospect theory cpt preferences that can overcome both challenges the key insight is that the variance premium can be written as the expected return on a portfolio of otm call and put options and the probability weighting feature of cpt can explain the puzzlingly low returns observed for these options using gmm on a sample of u s index option returns between 1996 and 2010 we show that the cpt model ts well observed option prices and therefore the variance premium in a dynamic setting probability weighting and time varying equity return volatility combine to match the observed time series pattern of the variance premium

assessing the relative performance of u k university technology transfer offices parametric and non parametric evidence abstract we present evidence on the relative performance of u k university technology transfer offices ttos using data envelopment analysis dea and stochastic frontier estimation sfe u k ttos are found to exhibit low levels of absolute efficiency there also appear to be decreasing returns to scale implying that ttos may need to be reconfigured into smaller units the development of regionally based sector focused ttos is also advised consistent with qualitative evidence from u s ttos we find that there is a need to upgrade the business skills and capabilities of u k tto managers and licensing officers

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

investor sentiment variance risk premium and delta hedged gains abstractdelta hedged gains are supposed to be negative and represent a volatility risk premium using a sample of standard poor 500 index options from 2006 to 2009 this study documents two anomalies that cannot be explained by the volatility risk premium first delta hedged gains are more negative for out of money options than for at the money options second delta hedged gains are significantly positive during financial crisis period we propose a behavioural explanation in which both option prices and stock prices are affected by investor s sentiment but pessimistic sentiment has a greater impact on stock market than option market this asymmetric response to pessimistic mood in turn affects the relative expensiveness of option prices

discount window borrowing monetary policy and the post october 6 1979 federal reserve operating procedure abstract a demand schedule for discount window borrowing based on profit maximizing bank behavior is derived a feature of non price rationing at the discount window making longer duration borrowing more costly is shown to make lagged borrowing and expected future spreads between the federal funds rate and the discount rate relevant to the current borrowing decision consequently both the size of the coefficients in the borrowing functions as well as the form of the function itself depend on expected fed policy toward the spread the demand function for discount window borrowing provides the critical link by which non borrowed reserve control affects short term interest rates and ultimately the money supply under post october 6 1979 reserve targeting the analysis suggests some reasons why the fed has experienced difficulty in specifying estimating and utilizing a discount window borrowing function in the non borrowed reserve operating procedure

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

is the conventional view of discount window borrowing consistent with the behavior of weekly reporting banks discount window borrowing by weekly reporting banks disaggregated by federal reserve district is used to estimate marvin goodfriend s 1983 model of borrowed reserves little evidence is found to support the argument that a bank s borrowing decision is determined by the spread between the funds rate and the discount rate and by prior bank borrowing a weekly reporting bank has only a 2 7 percent chance of visiting the discount window during any given maintenance period this result is consistent with the presence of considerable harassment costs imposed by the discount window officer copyright 1994 by mit press

divisia moments of australian consumption abstract quarterly australian consumption data 1959 1978 are used to compute divisia price and quantity indexes together with divisia variances and covariances the quantity variances tend to exceed the price variances and the price quantity covariances are mostly negative estimates of the income flexibility are also presented

divisia moments of u s consumption 1929 1982 abstract using u s consumption data for 1929 to 1982 divisia price and volume indexes are computed as well as divisia variances and covariances the quantity variances tend to be larger than the price variances and the majority of the price quantity covariances is negative

the growing reluctance to borrow at the discount window an empirical investigation federal reserve regulation a imposes formal guidelines on borrowing from the discount window and ensures that the facility is used for appropriate purposes in a way this regulation imposes a nonprice mechanism that compels depository institutions to be more prudent in exercising their borrowing privileges in the 1980s however banks became increasingly more reluctant to borrow adjustment credit from the discount window this behavior is puzzling because discount window guidelines have not changed this paper investigates the reasons behind the weakened demand for borrowed reserves our empirical findings suggest that the growing reluctance to borrow stems from the deteriorating financial position of banks during this period in particular banks avoided the discount window because they feared that market participants might have interpreted their visits as a signal of serious funding difficulties

ideal divisia moments price dispersion and inflation abstract ideal divisia price and quantity index numbers are computed for 18 countries using per capita consumption data for the 1970 s correlation matrices of general price change and price dispersion are computed and determinants of price dispersion are analyzed

the model structure of discount window borrowing this article investigates the specification of discount window borrowing the author establishes empirically that the borrowing function is heteroskedastic and nonlinear subsequently he proceeds to propose a simple theoretical framework that generates endogenously these anomalies in particular the author demonstrates that such phenomena are precipitated by the response of depository institutions to discount credit rationing and federal reserve collateral limitations copyright 1991 by ohio state university press

central bank secrecy fed watching and the predictability of interest rates abstract a common criticism of central bank secrecy is the assertion that it will lead to lower forecast accuracy on the part of private agents the model considered here demonstrates that reducing central bank secrecy can actually reduce the forecasting accuracy of many of the private agents in the economy when it is recognized that some agents engage in fed watching and others do not this result comes about because the interest rate process depends in part on the information that agents use in forecasting future interest rates

divisia moments of indian consumption abstract divisia moments of the first and second order are presented for indian annual price and quantity data separately for 23 and 8 commodity groups of consumption covering the period 1960 1979 contrary to the results reported for other countries in a majority of cases the price variances tend to exceed the quantity variancesin both data sets

hedging volatility risk abstract volatility risk plays an important role in the management of portfolios of derivative assets as well as portfolios of basic assets this risk is currently managed by volatility swaps or futures however this risk could be managed more efficiently using options on volatility that were proposed in the past but were never introduced mainly due to the lack of a cost efficient tradable underlying asset the objective of this paper is to introduce a new volatility instrument an option on a straddle which can be used to hedge volatility risk the design and valuation of such an instrument are the basic ingredients of a successful financial product in order to value these options we combine the approaches of compound options and stochastic volatility our numerical results show that the straddle option is a powerful instrument to hedge volatility risk an additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk

volatility of volatility risk we show that market volatility of volatility is a significant risk factor that affects index and volatility index option returns beyond volatility itself the volatility and volatility of volatility indices identified model free as the vix and vvix respectively are only weakly related to each other delta hedged index and vix option returns are negative on average and are more negative for strategies that are more exposed to volatility and volatility of volatility risks further volatility and volatility of volatility significantly negatively predict future delta hedged option payoffs the evidence suggests that volatility and volatility of volatility risks are jointly priced and have negative market prices of risk