optimal investments in power generation under centralized and decentralized decision making this work presents a novel model for optimization of investments in new power generation under uncertainty the model can calculate optimal investment strategies under both centralized social welfare and decentralized profit objectives the power market is represented with linear supply and demand curves a stochastic dynamic programming algorithm is used to solve the investment problem where uncertainty in demand is represented as a discrete markov chain the stochastic dynamic model allows us to evaluate investment projects in new base and peak load power generation as real options and determine optimal timing of the investments in a case study we use the model to compare optimal investment strategies under centralized and decentralized decision making a number of interesting results follow by varying the assumptions about market structure and price response on the demand side

industry classifications and return comovement a company s industry affiliation is commonly used to construct homogeneous stock groupings for portfolio risk management relative valuation and peer group comparisons a variety of industry classification systems have been adopted however creating disagreements as to companies industry assignments this analysis of the global industry classification system gics and fama french system indicates that common movement in returns and operating performance resulting from industry effects is stronger for stocks of large companies than for those of small companies also increasingly fine levels of disaggregation improve discrimination up to six digit gics codes after which the benefits tail off stock groupings based on industry exhibit stronger out of sample homogeneity than groups formed from statistical cluster analysis

measuring noise in exchange rate models abstract this paper conducts a race between models in terms of their ability to explain observed violations of uncovered interest parity this is done by comparing the empirical performance of the simple efficiency hypothesis and the models which assume the existence of risk premiums my analysis uses noise ratios which complement specification tests by showing the relative degree to which each model reconciles with the data the empirical results imply that the risk premiums introduced by the latent variable model could significantly explain the deviation of forward exhange rates from the expected future spot rates

on universal currency hedges this paper identifies five universal currency hedge ratio uhr definitions these are hedge positions in foreign bonds stated as a fraction of national or global equity portfolios that are the same for all investors regardless of nationality the first three involve the total demand for foreign bonds and depend on equities not being held for hedging purposes the last two are associated with variance minimizing regression hedges these hold in general but are designed exclusively for hedging other traded asset positions jensen s inequality makes the choice of measurement currency irrelevant and makes the hrs universal without affecting their values

the asymmetric behavior and procyclical impact of asset correlations abstract this paper examines the behavior of asset correlations with the market returns in the asymptotic single risk factor asrf approach of the basel ii accord on regulatory capital requirement over a sample period from 1988 to 2007 we find that asset correlations are positively related to firm size but negatively related to firm default probability asset correlations are also industry specific as firms in media transportation pharmaceutical and semiconductor industries exhibit higher asset correlations than those in retail and consumer staples most importantly asset correlations are asymmetric and have a procyclical impact on the real economy after controlling for these effects they tend to rise during economic downturns but decline during economic upturns the average magnitude of the rise is larger than that of the decline these findings suggest that asset correlations may be underestimated during economic downturns and may provide policy implications for the capital requirement framework

tests of three parity conditions distinguishing risk premia and systematic forecast errors abstract this study provides evidence that uncovered interest differentials between currencies cannot be attributed to either risk premia or systematic forecast errors alone the evidence is based on developing joint tests of three parity conditions uncovered interest parity purchasing power parity and real interest parity the study tests parameter restrictions based on knowing that risk premiums only affect nominal and real interest differentials but not inflation differentials while systematic errors in forecasting exchange rates only affect nominal interest differentials and inflation differentials but not real interest differentials the study finds a variety of cases where deviations from some or all of the parity conditions can be systematically related to variables currently known to investors and borrowers the most intriguing evidence is that for some currencies these deviations from parity are perfectly correlated as if they were driven by a common factor

scenario modelling for selective hedging strategies abstract we study currency risk management in the context of scenario analysis we develop scenario based optimization models that jointly determine the portfolio composition and the hedging strategy within each currency thus the model prescribes optimal selective hedging policies we then study empirically the performance of the models the new elements of our empirical analysis are various horizons one month and one semester various currency bases explicit incorporation of realistic transaction costs the results show that selective hedging strategies dominate the alternatives under some conditions and that transaction costs are very important in determining the profitability of various currency risk management strategies for both stocks and bonds at the one month horizon

u s reits as an asset class in international investment portfolios an examination of u s real estate investment trust reit efficiency as a portfolio component from the perspective of all g 7 countries for the period 1985 through 1994 indicates that u s reits offer both an inflation hedge and diversification nevertheless including reits in test portfolios did not yield statistically significant increases in risk adjusted return over the period as a whole subperiod analyses indicated large temporal differences in reit efficiency as a portfolio component

a dynamic stochastic programming model for international portfolio management we develop a multi stage stochastic programming model for international portfolio management in a dynamic setting we model uncertainty in asset prices and exchange rates in terms of scenario trees that reflect the empirical distributions implied by market data the model takes a holistic view of the problem it considers portfolio rebalancing decisions over multiple periods in accordance with the contingencies of the scenario tree the solution jointly determines capital allocations to international markets the selection of assets within each market and appropriate currency hedging levels we investigate the performance of alternative hedging strategies through extensive numerical tests with real market data we show that appropriate selection of currency forward contracts materially reduces risk in international portfolios we further find that multi stage models consistently outperform single stage models our results demonstrate that the stochastic programming framework provides a flexible and effective decision support tool for international portfolio management

commodity liquidity measurement and transaction costs we examine the performance of liquidity proxies in commodities the amihud measure has the largest correlation with liquidity benchmarks amivest and effective tick measures also perform well these proxies are useful for studies of commodity liquidity over a long time period and those that lack access to high frequency data we use various aspects of transaction costs such as spread depth immediacy and resiliency to give insight into the costs of different execution approaches transaction costs increase with volatility and exhibit mean reversion splitting trades over one hour can reduce trading costs by two thirds compared to an immediate execution the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the speculative efficiency hypothesis the hypothesis that forward prices are the best unbiased forecast of future spot prices is often presented in the economic and financial analysis of futures markets this paper considers the hypothesis independently of its implications for rational expectations or market efficiency and in order to stress this fact the term speculative efficiency is used to characterize the state envisaged under the hypothesis if a market is subject to efficient speculation the supply of speculative funds is infinitely elastic at the forward price that is equal to the expected future spot price the expected future spot price is a market price determined as the solution to the underlying rational expectations macroeconomic model although the paper is primarily concerned with testing this hypothesis in the foreign exchange market the methodology introduced in the paper is of general application to all futures markets this abstract was borrowed from another version of this item

continuous time model of uncovered interest parity with regulated jump diffusion interest differential this study investigates to what extent can an exchange rate model built on uncovered interest parity uip match the empirical features of the exchange rate and the interest differential data this article presents a continuous time model of uip in which the interest differential evolves following regulated jump diffusion simulation experiments show that the model is capable of matching several important features of the data inclusion of jumps improves the model to capture persistent dynamics of interest differential and fat tails in exchange rate returns compared to simple diffusion processes

exchange rate shocks currency options and the siegel paradox abstract this note explores the relationship between risk and premium in foreign exchange rates we show that investors in different countries demand different premiums for the same source of risk the difference in the premiums is related only to the volatility of the source of risk and not to investor risk attitudes we show how this difference is consistent with arbitrage pricing and that any contingent claim on the exchange rate has a unique price even when the exchange rate can jump in particular we resolve the seeming inconsistency reported by dumas et al 1993a for jump models of exchange rates

what s my line a comparison of industry classification schemes for capital market research this study compares four broadly available industry classification schemes in a variety of applications common to capital market research standard industrial classification sic codes have been available since 1939 but are being replaced by north american industry classification system naics codes the global industry classifications standard gics sm system jointly developed by standard poor s and morgan stanley capital international msci is popular among financial practitioners whereas the fama and french 1997 algorithm is used primarily by academics our results show that gics classifications are significantly better at explaining stock return comovements as well as cross sectional variations in valuation multiples forecasted and realized growth rates research and development expenditures and various key financial ratios the gics advantage is consistent from year to year and is most pronounced among large firms the other three methods differ little from each other in most applications

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

international diversification of investment portfolios u s and japanese perspectives in this paper we analyze the gains from international diversification of investment portfolios from the japanese as well as the u s perspectives the major findings of this paper include first the potential gains from international as opposed to purely domestic diversification are much greater for u s investors than for japanese investors for u s investors the gains accrue not so much in terms of lower risk as in terms of higher return and the opposite holds for japanese investors second using various ex ante international investment strategies designed to control parameter uncertainty u s investors can realize substantial gains from international diversification in out of sample periods japanese investors however can gain relatively little third hedging exchange risk generally allows the u s but not japanese investors to benefit more from international diversification for u s investors the international bond diversification with exchange risk hedging offers a superior risk return trade off than the international stock diversification with or without hedging

the growth of executive pay this paper examines both empirically and theoretically the growth of us executive pay during the period 1993 2003 during this period pay has grown much beyond the increase that could be explained by changes in firm size performance and industry classification had the relationship of compensation to size performance and industry classification remained the same in 2003 as it was in 1993 mean compensation in 2003 would have been only about half of its actual size during the 1993 2003 period equity based compensation has increased considerably in both new economy and old economy firms but this growth has not been accompanied by a substitution effect i e a reduction in non equity compensation the aggregate compensation paid by public companies to their top five executives during the considered period added up to about 350 billion and the ratio of this aggregate top five compensation to the aggregate earnings of these firms increased from 5 per cent in 1993 5 to about 10 per cent in 2001 3 after presenting evidence about the growth of pay we discuss alternative explanations for it we examine how this growth could be explained under either the arm s length bargaining model of executive compensation or the managerial power model among other things we discuss the relevance of the parallel rise in market capitalizations and in the use of equity based compensation copyright 2005 oxford university press

do momentum based strategies still work in foreign currency markets this paper examines the performance of momentum trading strategies in foreign exchange markets we find the well documented profitability of momentum strategies during the 1970s and the 1980s has continued throughout the 1990s our approach and findings are insensitive to the specification of the trading rule and the base currency for analysis finally we show that the performance is not due to a time varying risk premium but rather depends on the underlying autocorrelation structure of the currency returns in sum the results lend further support to prior momentum studies on equities the profitability to momentum based strategies holds for currencies as well

new evidence on the forward premium puzzle the forward premium anomaly exchange rate changes are negatively related to interest rate differentials is one of the most robust puzzles in financial economics we recast the underlying parity relation in terms of lagged forward interest rate differentials documenting a reversal of the anomalous sign on the coefficient in the traditional specification we show that this novel evidence is consistent with recent empirical models of exchange rates that imply exchange rate changes depend on two key variables the interest rate differential and the magnitude of the deviation of the current exchange rate from that implied by purchasing power parity

conditional hedging and portfolio performance simple conditional currency hedging rules often increase risk adjusted portfolio returns and are thus of interest to investors several researchers have reported successful application of a forward hedge rule fhr in which one hedges whenever the foreign currency trades at a forward premium an alternative strategy a real interest rate hedge rule rir is based on hedging when the domestic real interest rate exceeds the foreign rate as an extension we propose a combination of these rules a real forward hedge rule rfhr we evaluate the performance of the rules for various currency stock and bond portfolios from the developed countries in tests of risk adjusted returns for 1976 1997 the rfhr significantly outperformed standard benchmarks and often beat the fhr and the rir moreover results of a simple dominance test for rolling 5 and 10 year periods suggest that the rfhr consistently improves portfolio performance for a u s investor

the significance of technical trading rule profits in the foreign exchange market a bootstrap approach abstract in this paper we present new evidence on the profitability and statistical significance of technical trading rules in the foreign exchange market we utilize a new data base currency futures contracts for the period 1976 1990 and we implement a new testing procedure based on bootstrap methodology our results suggest that simple technical trading rules have very often led to profits that are highly unusual splitting the entire sample period into three 5 year periods reveals that on average the profitability of some trading rules declined in the latest period although profits remained positive on average and significant in many cases jel f31 f47 g15

electric power system planning under time of use rates investment decisions under time of use rates and their relationship to utility system planning are examined optimal investment and price under social welfare maximization are derived and compared with the results of static analyses for a multiplant case the optimal pricing and investment policy are characterized by a plant of lower cost in a wide range of cost parameters it is found that the second best price the so called ramsey price is higher than the best price by an amount proportional to the ratio of deficit to revenue of an electric utility

empirical evidence on the currency carry trade 1900 2012 abstract most of the currency literature investigates the risk and return characteristics of the currency carry trade after the collapse of the bretton woods system in order to gauge the long term currency carry premium we extend the sample to 20 currencies over the period 1900 to 2012 we find modest sharpe ratios in the range of 0 2 0 4 for carry trading over this period this is markedly lower than the sharpe ratios above 0 6 reported for recent sample periods we document that carry trading occasionally incurs substantial losses which fits well with risk based explanations for deviations from uncovered interest parity we find that large carry trading losses do not necessarily coincide with large losses in global equity markets our results help to better understand the source and nature of excess returns on the carry trade

the carry trade and fundamentals nothing to fear but feer itself the carry trade is the investment strategy of going long in high yield target currencies and short in low yield funding currencies recently this nave trade has seen very high returns for long periods followed by large crash losses after large depreciations of the target currencies based on low sharpe ratios and negative skew these trades could appear unattractive even when diversied across many currencies but more sophisticated conditional trading strategies exhibit more favorable payos we apply novel within economics binary outcome classication tests to show that our directional trading forecasts are informa tive and out of sample loss function analysis to examine trading performance the critical conditioning variable we argue is the fundamental equilibrium exchange rate feer expected returns are lower all else equal when the target currency is overvalued like traders researchers should incorporate this information when evaluating trading strategies when we do so some questions are resolved negative skewness is purged and market volatility vix is uncorrelated with returns other puzzles remain the more sophisticated strategy has a very high sharpe ratio suggesting market ineciency

preference based strategic currency hedging this article considers the value to a given investor of volatility reduction through currency hedging relative to taking an unhedged position included is a decision framework to help international investors analyze how the potential risk reduction benefits of hedging interact with the investor s beliefs about the currency risk premium risk aversion and investment constraints to determine an optimal currency hedging strategy in our framework investors choose from nine hedging strategies each of which may be optimal under a specific set of assumptions the article concludes that a unitary hedge strategy is best for investors who do not forecast currency returns for those who make strategic currency return forecasts our aggregated results suggest an optimized hedge strategy using expected return inputs from an asset pricing model

large scale minimum variance portfolio allocation using double regularization abstract estimation of time varying covariances is a crucial input in minimum variance mv portfolio allocations rolling window based sample estimates are widely used for this purpose but they usually suffer from two major issues when applied to a moderately large number of assets the curse of dimensionality and temporal instability here we propose a double regularized estimator for a high dimensional covariance matrix in which we impose both a temporal and cross sectional sparsity regularization on the sample based estimates to simultaneously mitigate these two issues we investigate the performance of our proposed covariance estimator for mv portfolio construction using monte carlo experiments and empirical examples we find that the resulting mv portfolio strikes a good balance between risk and turnover reduction and produces more accurate equivalent returns after transaction costs are taken into account when compared to four other mv strategies

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

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

a reexamination of the uncovered interest rate parity hypothesis abstract it is now widely known that the uncovered interest rate parity uip hypothesis which states that forward exchange rates are unbiased predictors of future spot exchange rates is generally rejected by empirical evidence we show in this paper by means of a cox et al 1985 model extended to a two country economy that a careful examination of the no arbitrage principle leads to a different formulation for this hypothesis roughly speaking this new formulation states that the expected future spot exchange rate is equal to the forward exchange rate multiplied by a term premium whose closed form expression can be derived moreover this multiplicative term premium reduces to 1 i e the standard uip hypothesis holds if and only if conditional variances are deterministic in short we show that rejection of the standard uip hypothesis is not surprising as long as arch effects have been evidenced in exchange rate data as a by product we provide a parametric and tractable specification for the so called risk premium i e the component of the expected exchange rate in excess of the forward exchange rate

game theory approach to use of noncommercial power plants under time of use pricing the authors use the game theory approach for evaluating the impact of the introduction of customer owned noncommercial power plants ncp when time of use pricing is used various results from this analysis are derived some of which are that the conflict between ncp customer and the supplier forces the supplier to reduce the price of ncp customers perception of the situation in which they are involved in plays an important role in this conflict the game model analysis presented provides a detailed quantitative information on electricity prices and on the ways of using ncp

tests of international capm with time varying covariances we perform maximum likelihood estimation of a model of international asset pricing based on capm we test the restrictions imposed by capm against a more general asset pricing model the betas in our capm vary over time as the supplies of assets change and as the conditional covariances or returns on those assets change we let the covariances change over time as a function of macroeconomic data and an alternative model allows the covariances to follow a multivariate arch process we also can identify a modified capm model with measurement error we find that the estimated capm performs much better when variances are not constant over time nonetheless capm is rejected in favour of the lessrestricted model of asset pricing

the forward bias in the ecu peso risks vs fads and fashions abstract forward rates of european currencies against the private and official ecu exhibit a bias similar to the one found in other data the cumby obstfeld fama cof regression coefficients are systematically below unity and two thirds of them are negative we use the discount of the private ecu relative to the official ecu as a measure of market scepticism or mistrust in one view this sentiment is based on peso risk fears of realignments and possibly also the risk of a meltdown of the private ecu relative to the official one alternatively the discount just reflects fads and fashions dichotomizing the data on the basis of the size of the discount in the private ecu we find that the cof beta strongly depends on the degree of mistrust and that the negative cof coefficients are generated by typically less than 20 of the data but the pattern fits the fads and fashion view better than the peso theory if the sentiment factor contains a conventional risk premium at all then this risk premium is definitely not the one predicted by bansal bansal r 1997 an exploration of the forward premium puzzle in currency markets review of financial studies 10 369 403 nor is the sentiment factor proxying for huisman et al s huisman r koedijk k kool c nissen f 1998 extreme support for uncovered interest parity journal of international money and finance 17 211 228 transaction cost effects

integrated dynamic models for hedging international portfolio risks abstract we develop scenario based stochastic programming models for hedging the risks of international portfolios using options the models provide increasing level of integration in managing market and foreign exchange fx risks we start with a single stage model with currency options for selective hedging of fx risks while market risk is addressed through diversification we add stock options to hedge market risks and add quantos and currency options to develop an integrated model using an innovative method to price quantos on the scenario tree underpinning the stochastic program the models are extended to multi stage settings backtesting on market data over a 14 year period that includes the global financial crisis of 2008 we demonstrate the effectiveness of taking increasingly integrated views of risk management simultaneous hedging of market and fx risks using stock and currency options has the best ex post performance the differences are economically significant and statistical significance is established through rigorous hypothesis testing the models are particularly effective during the crisis test results show that two stage models outperform their single stage counterparts regardless of the hedging strategy

currency risk premia and uncovered interest parity in the international capm abstract zero investment uncovered interest parity uip portfolio positions provide perfect factor mimicking portfolios for currency risk in the international capm context their returns are the currency risk premia since the uip positions on average provide low returns the currency risk premia must be low so that currency risk appears not to be priced in an unconditional model however previous research has shown that uip returns are predictable and may be quite substantial conditionally we use this observation to generate a specific conditional version of the international capm a gmm approach shows that the conditional model performs well while the unconditional international capm is marginally rejected the paper thus argues that previous rejections of the international capm stem from the fact that currency risk premia are by nature low over extended periods of time and do not provide evidence against the international capm

foreign banks and foreign currency lending in emerging europe based on survey data from 193 banks in 20 countries we provide the first bank level analysis of the relationship between bank ownership bank funding and foreign currency fx lending across emerging europe our results contradict the widespread view that foreign banks have been driving fx lending to retail clients as a result of easier access to foreign wholesale funding our cross sectional analysis shows that foreign banks do lend more in fx to corporate clients but not to households moreover we find no evidence that wholesale funding had a strong causal effect on fx lending for either foreign or domestic banks panel estimations show that the foreign acquisition of a domestic bank does lead to faster growth in fx lending to households however this is driven by faster growth in household lending in general not by a shift towards fx lending

cvar models with selective hedging for international asset allocation abstract we develop an integrated simulation and optimization framework for multicurrency asset allocation problems the simulation applies principal component analysis to generate scenarios depicting the discrete joint distributions of uncertain asset returns and exchange rates we then develop and implement models that optimize the conditional value at risk cvar metric the scenario based optimization models encompass alternative hedging strategies including selective hedging that incorporates currency hedging decisions within the portfolio selection problem thus the selective hedging model determines jointly the portfolio composition and the level of currency hedging for each market via forward exchanges we examine empirically the benefits of international diversification and the impact of hedging policies on risk return profiles of portfolios we assess the effectiveness of the scenario generation procedure and the stability of the model s results by means of out of sample simulations we also compare the performance of the cvar model against that of a model that employs the mean absolute deviation mad risk measure we investigate empirically the ex post performance of the models on international portfolios of stock and bond indices using historical market data selective hedging proves to be the superior hedging strategy that improves the risk return profile of portfolios regardless of the risk measurement metric although in static tests the mad and cvar models often select portfolios that trace practically indistinguishable ex ante risk return efficient frontiers in successive applications over several consecutive time periods the cvar model attains superior ex post results in terms of both higher returns and lower volatility

testing for market timing ability abstract in this paper we examine the henriksson merton test of market timing and its potential usefulness in evaluating investment advice the paper proposes a natural extension of the test that is valid under more general assumptions about the distribution of asset returns we show that the henriksson merton test and its more general counterpart are special cases of standard tests of market rationality and efficiency both tests are applied to a group of foreign exchange advisory services

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

the risk adjusted uncovered equity parity abstract this paper explores the risk adjusted uncovered equity parity model to investigate a degree of market integration for four asian emerging markets relative to the u s japan and the u k from january 1994 to july 2008 the uncovered equity parity is revised to take into account of market risk in a framework of a portfolio rebalancing model evidence was found to strongly support our hypotheses market risk is significant in international capital flows between the asian emerging markets and the developed economies and it can help explain the failure of a traditional uncovered equity or interest parity model the relationship between returns and an appreciation of the exchange rate are divided between the asian emerging markets and the developed economies depending on the direction of capital flows

beating the foreign exchange market filter rule profits found in foreign exchange markets in the early days of the current managed float persist in later periods as shown by statistical tests developed and implemented here the test is consistent with but independent of a wide variety of asset pricing models the profits found cannot be explained by risk if risk premia are constant over time inclusion of the home foreign interest rate differential in computing profits has little effect on the comparison of filter returns to those of buy and hold in the early years of the generalized managed floating that began in march 1973 filter rule profits in excess of buy and hold were found for many countries logue sweeney and willett 18 dooley and shafer 6 cornell and dietrich 5 it was unclear however whether such profits indicated inefficiencies first it was not clear that risk was adequately handled in such tests and often risk was ignored second there was no evidence such profits would be available postsample and third there was no statistical test of the significance of these profits this paper uses the logic of risk return tradeoffs to analyze the role of risk in such tests and illustrates the logic in a discussion using the sharpe lintner capital asset pricing model capm although a breeden consumption based capm a merton intertemporal capm or an arbitrage pricing model apm could easily be used the paper develops a test of statistical significance appropriate to foreign exchange markets section i analyzing the rate of return on foreign exchange speculation less the foreign domestic interest rate differential the test explicitly assumes that risk premia are constant over the sample the excess rates of return observable in using filters in going from a risk free dollar asset to a risk free deutsche mark dm asset persist into the 1980 s section ii and this is true even when taking account of transactions costs it turns out that these results for the dm case do not depend very much on the interestrate differential but primarily on exchange rate behavior this is useful to know because it is often quite difficult to find matching interest rate data of high quality for a sample of nine other currencies using only exchange rates section iii shows that the excess returns made in the first 610 days of the float persist in the next 1 220 days into the 1980 s dooley and shafer 7 find similar persistence in experiments that do not use buy and hold and have no significance tests when filter rule profits have been found in spot exchange markets it has often been argued that the profits are due to risk this paper uses the capm to analyze rates of return both to buy and hold and to filter strategies it turns out that the claremont mckenna college and claremont graduate school arthur d warga douglas joines and thomas d willett offered helpful comments and ning ning koo provided research assistance

optimal currency hedge ratios and interest rate risk abstract the objective of this article is to provide a framework for the interpretation of the optimal currency hedge ratios on foreign investments taking into account interest rate risk this is made possible by using a continuous time setting in the spirit of merton 1969 we focus on the importance of the interest rate differential forward basis in setting the optimal currency hedge because of the influence of interest rates on exchange rates more specifically we consider two discount bonds a domestic and a foreign one which follow stochastic processes possibly correlated with the other state variables of the model it is shown that the optimal hedge ratio can be split into five components a a macro economic component which is a function of the volatility of the interest rate differential and its covariance with currency movements this term depends on the currency considered but not on the asset being hedged b an asset specific term which is directly related to the covariance of the foreign currency asset return with exchange and interest rate movements c a speculative term function of the investor s risk preference and of the conditional risk premium on the exchange rate and d two stochastic opportunity set hedging terms the analysis of the optimal hedge ratio is illustrated on the period december 1970 1989 for stock and bond investments in seven countries jel g15 f31

reexamining staggered boards and shareholder value abstract cohen and wang 2013 cw2013 provide evidence consistent with market participants perceiving staggered boards to be value reducing amihud and stoyanov 2016 as2016 contests these findings reporting some specifications under which the results are not statistically significant we show that the results retain their significance under a wide array of robustness tests that address the concerns expressed by as2016 our empirical findings reinforce the conclusions of cw2013

were the returns from stocks and bonds of different countries really different in the 1980 s we analyzed the total equity returns of indexes from australia canada germany japan the uk and the us and total fixed income returns of indexes from all but australia excluded due to lack of data to see if the returns of stocks and bonds were statistically different across markets during the 1980s at the end of 1989 these countries represented over 87 of the market capitalization of the morgan stanley capital international msci world equity index and over 88 of the salomon brothers world bond index this study used monthly observations from january 1980 through december 1989 and examined returns based in local currency and hedged and unhedged us dollars we found that sample mean stock and bond returns during the 1980s were statistically indistinguishable across countries however because the sample variances were so large relative to the sample means it would have been difficult to detect differences in population means by any test we found evidence of variance heterogeneity which may be

do asset demand functions optimize over the mean and variance of real returns a six currency test abstract international asset demands are functions of expected returns optimal portfolio theory tells us that the coefficients in this relationship depend on the variance covariance matrix of real returns but previous estimates of the optimal portfolio 1 assume expected returns constant and 2 are not set up to test the hypothesis of mean variance optimization we use maximum likelihood estimation to impose a constraint between the coefficients and the error variance covariance matrix for a portfolio of six currencies we are able statistically to reject the constraint evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end of period wealth or else are too sophisticated to do so

a comparison of industry classification schemes a large sample study in a large sample setting we compare four broadly available industry classification schemes in their effectiveness to group stocks with similar operating characteristics we demonstrate the advantage of the global industry classification scheme to be consistent across different application schemes common to capital market research and across different groups of firms

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

a stochastic dominance analysis of yen carry trades abstract yen carry trades have made headline news for over a decade we examine the profitability of such trades for the period 2001 2009 yen carry trades generated high mean returns and sharpe ratios prior to the recent financial crisis they continued to outperform major stock markets for the full sample period given the non normality of carry trade returns we apply non parametric tests based on stochastic dominance sd to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on us and global stock market indices we apply a general test for sd developed recently by linton maasoumi and whang 2005 to six currencies as well as portfolios of these currencies for a large class of risk averse investors profits from yen carry trades cannot be attributed to risks

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

on the efficiency of intra industry information transfers the dilution of the overreaction anomaly abstract we revisit the stock market anomaly documented by thomas and zhang 2008 and show that the apparent mispricing of information transfers has decayed over time as the us markets experienced rapid improvements in the efficiency of the underlying price formation processes utilizing recent advancements in market microstructure research to estimate firm specific proxies for market efficiency we demonstrate that the existence of the overreaction anomaly where stock prices of late announcers in response to the earnings reported by early announcers in the same industry are negatively related to subsequent price responses of late announcers to their own earnings reports is specific to an earlier sample period and results from the inefficient incorporation of information into prices largely attributable to an environment with high barriers to arbitrage our results indicate that the pricing efficiency of intra industry information transfers has increased in the recent years of increased liquidity and markedly higher trading activity

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

sics as delineators of economic markets the standard industrial classification sic is often used to divide firms into homogeneous markets firms classified into the same n 1 digit sic are thought to be more homogeneous than firms sharing only the same n digit sic this study measures how well the sic succeeds at combining firms into homogeneous economic markets assuming that firms in more similar economic markets should display more similar sales changes profit rates or stock price changes than firms in less similar economic markets the author finds that the sic is not successful at identifying firms with such similar characteristic variables copyright 1989 by the university of chicago

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

a global stock and bond model six fundamental risk factors four for stocks and two for bonds explain most of the common volatility of individual stocks and bonds worldwide some of the risk factors have a strong international component and others are more purely national the cross national component of the risk factors tends to be stronger within the european union than worldwide the model proposed in this article can be used for integration of worldwide asset selection and asset allocation decisions

internal capital markets and firm level compensation incentives for division managers do multidivisional firms structure compensation contracts for division managers to mitigate incentive problems in their internal capital markets i find evidence that compensation and investment incentives are substitutes firms providing a stronger link to firm performance in incentive compensation for division managers also provide weaker investment incentives through the capital budgeting process specifically as the proportion of incentive pay for division managers that is based on firm performance increases division investment is less responsive to division profitability these findings are generally consistent with a model of influence activities by division managers in interdivisional capital allocation decisions

currency hedging for international portfolios this paper examines the benefits from currency hedging both for speculative and risk minimization motives in international bond and equity portfolios the riskreturn performances of globally diversified portfolios are compared with and without forward contracts over the period 1974 to 1990 inclusion of forward contracts results in statistically significant improvements in the performance of unconditional portfolios containing bonds conditional strategies are also implemented both in sample and out of sample and are shown to both significantly improve the risk return tradeoff of global portfolios and to outperform unconditional hedging strategies whether international portfolios should be hedged against currency risks is the subject of an active debate the theoretical side of the debate has been closely associated with two strands in the academic literature international asset pricing and optimal hedging in the futures markets in the international asset pricing model iapm of solnik 1974 optimal portfolios contain positions in forward contracts or equivalently foreign currency denominated bills these positions which can differ from the positions in foreign stocks have since been termed hedges black 1990 shows that under additional assumptions the hedge ratios should be identical for all investors regardless of their nationality universality and that investors should never fully hedge their foreign currency exposures similarly theoretical models from the futures literature produce demands for hedging instruments that contain both speculative and hedging components the empirical issue unanswered so far is whether adding forward contracts to international portfolios significantly improves the risk return profile of global investments empirical research has barely begun to respond to the challenges of theoretical models there exists little empirical evidence on either the relevance of black s universal hedge ratios or the optimality of hedge ratios less than one instead researchers have concentrated on the benefits of fully hedging exchange risk for example eun and resnick 1988 indicate that stock portfolios perform better when fully hedged but offer no statistical tests

the currency hedging decision a search for synthesis in asset allocation many asset allocation and liability management decisions are controversial but the decision that frequently generates the most debate is the currency hedging decision strong feelings on currency exposure policy are usually based on the conviction that currency exposures should be determined by a simple mechanical process but not everyone advocates the same process a survey of the leading proposals to simplify the currency management process suggests that a baseline currency policy may lend itself to some mechanical rules but the rules are more complex than any of the widely advocated currency hedging policies suggest equity and fixed income managers as well as asset allocators will find currency issues easier to understand if they view currencies as they would view any other financial instrument the importance of currency management is clearer if a manager and client start from a 50 50 hedged unhedged currency benchmark and if currency and money market returns are combined the combination of currency and money market returns strips primary currency movements from stock and bond returns clarifying intermarket correlations and creating synthetic stock and bond futures portfolios no one can harbor illusions that this study or any similar effort can completely eliminate currency hedging controversies the argument has gone on too long and too many positions are ossified nonetheless most practitioners can understand the strengths and weaknesses of the various currency hedging viewpoints and the assumptions behind them can be evaluated dispassionately this dispassionate evaluation leads to a baseline currency policy but not to a rigid prescription for currency hedging designed to satisfy the demand for a simple rule the policy suggests an approach that can help a manager measure the cost or risk of a specific currency com

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

a test of perfect substitutability in the foreign exchange market i motivations for the test the question of whether or not domestic bonds are perfect substitutes for foreign bonds in investors portfolios implying that the expected rates of returns must be equalized across currencies is an important one for two reasons the question is crucial first for choosing among various asset market models of exchange rate determination and second for evaluating tests of efficiency in the forward exchange market to illuminate the first motivation a brief discussion of models of exchange rate determination is necessary all asset market models share the assumption that there are no significant transactions costs capital controls or other impediments to the international flow of capital thus actual portfolios adjust instantaneously to equal desired portfolios this implies for example covered interest parity the domestic interest rate should differ from the foreign interest rate by an amount exactly equal to the forward discount rate perfect substitutability between domestic and foreign bonds is the stronger assumption that market participants are indifferent as to the currency composition of their portfolio it implies uncovered interest parity the domestic interest rate must differ from the foreign interest rate by an amount exactly equal to the expected rate of depreciation the perfect substitutability assumption is far from standard in fact exchange rate models within the asset market view can be classified into those that belong to the monetary approach defined by the assumption of perfect substitutability and those that belong to the portfolio balance approach defined by the assumption of imperfect substitutability in the portfolio balance approach investors hold well defined proportions of their wealth in the form of each country s assets with the proportions depending on the expected rates of return as in equation 1

an intra and inter industry evaluation of three classification schemes common in capital market research we compare the standard industry classification sic the north american industry classification system naics and the global industry classification standard gics schemes in their effectiveness to group stocks with similar operating characteristics we are the first to analyse and compare individual functional category levels within and across each industry classification and test whether the three industry classifications show significant improvement in homogeneity with finer industry partitions across a wide range of research applications our results suggest that the gics system offers advantages over the other two systems in grouping firms across all its levels of industry categories and across different application schemes common to capital market research however the sic and naics offer additional advantages across their finest industry partitions our study has important implications for users of industry classifications in various financial and economic analyses research settings and regul

flight to quality and correlation between currency and stock returns abstract we document that capital flows in and out of emerging or developed markets are sensitive to global equity market conditions capital tends to move out of emerging into developed countries in global down markets leading to depreciation appreciation of emerging developed currencies this generates a positive negative correlation between currency and equity in emerging developed markets which is amplified by the magnitude of the capital movement we also verify that hedging currency risks may undo the natural hedge and increase the total return volatility under negative correlation

further evidence on exchange rate expectations abstract this paper considers a previously unexploited survey data set of exchange rate expectations which allows us to focus on differences between ems and dollar exchange rates we corroborate the earlier finding in the literature that exchange rate forecasts are not rational and that agents do not use all available information efficiently although extrapolative and adaptive expectations formation mechanisms describe non ems exchange rate expectations to a certain extent ems exchange rates forecasts seem to follow long run fundamentals more closely and would suggest that agents believe that ems exchange rate expectations undershoot their long run equilibrium values jel f31

robust option pricing abstract in this paper we combine robust optimization and the idea of arbitrage to propose a tractable approach to price a wide variety of options rather than assuming a probabilistic model for the stock price dynamics we assume that the conclusions of probability theory such as the central limit theorem hold deterministically on the underlying returns this gives rise to an uncertainty set that the underlying asset returns satisfy we then formulate the option pricing problem as a robust optimization problem that identifies the portfolio which minimizes the worst case replication error for a given uncertainty set defined on the underlying asset returns the most significant benefits of our approach are a computational tractability illustrated by our ability to price multi asset american and asian options using linear optimization and thus the computational complexity of our approach scales polynomially with the number of assets and with time to expiry and b modeling flexibility illustrated by our ability to model different kinds of options various levels of risk aversion among investors transaction costs shorting constraints and replication via option portfolios

selective hedging strategies for oil stockpiling abstract as a feasible option for improving the economics and operational efficiency of stockpiling by public agency this study suggests simple selective hedging strategies using forward contracts the main advantage of these selective hedging strategies over the previous ones is not to predict future spot prices but to utilize the sign and magnitude of basis easily available to the public using the weekly spot and forward prices of west texas intermediate for the period of october 1997 august 2002 this study adopts an ex ante out of sample analysis to examine selective hedging performances compared to no hedge and minimum variance routine hedging strategies to some extent selective hedging strategies dominate the traditional routine hedging strategy but do not improve upon the expected returns of no hedge case which is mainly due to the data characteristics of out of sample period used in this analysis

testing the hypothesis of market efficiency in the taiwan us forward exchange market since 1990 this article examines the applicability of the hypothesis of market efficiency in taiwan s foreign exchange market using daily data instead of linear regression based models we consider the possibility that the true data generating process may come from two different distributions and we employ the markov switching approach to analyse this from the results of the two state markov switching model we define state 1 as the efficient state and state 2 as the inefficient one only the 30 day forward rate is able to differentiate between the two states based on the unconditional probabilities from the markov switching model we also find that the 30 day forward rate has a 70 probability in the efficient state which indicates that 70 of all speculators fully extract information when predicting future spot rates while 30 of all investors do not

applying regret theory to investment choices currency hedging decisions we apply regret theory an axiomatic behavioral theory to derive closed form solutions to optimal currency hedging choices investors experience regret of not having chosen the ex post optimal hedging decision hence investors anticipate their future experience of regret and incorporate it in their objective function we derive a model of financial decision making with two components of risk traditional risk volatility and regret risk we find results that are in sharp contrast with traditional expected utility loss aversion or disappointment aversion theories we discuss the empirical implications of our model and its ability to explain observed hedging behavior

equilibrium exchange rate hedging we assume a world like the one that gives the capital asset pricing model but with many goods and many countries we assume that investors in a given country have homothetic utility functions with the same weights and a currency that has a sure endof period value using a price index with those weights siegel s paradox derived from jensen s inequality makes investors want a positive amount of exchange risk when average risk tolerance is the same across countries every investor will hold the same mix of market risk through the world market portfolio of all assets and exchange risk in a diversified basket of foreign currencies in fact the ratio of exchange risk to market risk is equal to the average investor s risk tolerance we can write the ratio of exchange risk to market risk and the fraction of the market s exchange risk that investors hedge as depending on an average of world market risk premia an average of world market volatilities and an average of exchange rate volatilities the weights in these averages are the same as the weights of the different countries in the currency basket given these averages the ratio and the fraction hedged will not depend directly on exchange rate means or covariances in equilibrium we can use the ratio of exchange risk to market risk to measure average risk tolerance in this model risk tolerance is observable

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

risk premia carry trade dynamics and economic value of currency speculation in this paper we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range we show that exchange rate returns comprise a time varying risk premium and that uncovered interest parity uip holds in a speculative sense the often cited forward bias puzzle originates from the omission of the risk premium in standard uip tests consistent with its popularity among market professionals the carry trade strategy can be rationalized as it systematically collects risk premia and generates economic value when applied in multi currency portfolios

universal hedging optimizing currency risk and reward in international equity portfolios investors can increase their returns by holding foreign stocks in addition to domestic ones they can also gain by taking the appropriate amount of exchange risk but what amount is appropriate assume that investors see the world in light of their own consumption goods and count both risk and expected return when figuring their optimum hedges assume that they share common views on stocks and currencies and that markets are liquid and there are no barriers to international investing in this perfect world it is possible to derive a formula for the optimal hedge ratio this formula requires three basic inputs the average across countries of the expected returns on the world market portfolio the average across countries of the volatility of the world market portfolio and the average across all pairs of countries of exchange rate volatility these values can be estimated from historical data the formula in turn gives the circumstances for three rules 1 hedge foreign equity 2 hedge less than 100

exchange rate expectations and the pricing of chinese cross listed stocks abstract i show that the price discounts of chinese cross listed stocks american depositary receipts adrs and h shares to their underlying a shares indicate the expected yuan us dollar exchange rate the forecasting models reveal that adr and h share discounts predict exchange rate changes more accurately than the random walk and forward exchange rates particularly at long forecast horizons using panel estimations i find that adr and h share investors form their exchange rate expectations according to standard exchange rate theories such as the harrod balassa samuelson effect the risk of competitive devaluations relative purchasing power parity uncovered interest rate parity and the risk of currency crisis

the three types of factor models a comparison of their explanatory power multifactor models of security market returns can be divided into three types macroeconomic fundamental and statistical factor models macroeconomic factor models use observable economic time series such as inflation and interest rates as measures of the pervasive shocks to security returns fundamental factor models use the returns to portfolios associated with observed security attributes such as dividend yield the book to market ratio and industry identifiers statistical factor models derive their pervasive factors from factor analysis of the panel data set of security returns this paper compares the explanatory power of these three approaches for u s equity returns

a valuation approach to currency hedging 1994 a valuation approach to currency hedging financial analysts journal vol 50 no 2 pp 55 59

speculation spillovers this paper demonstrates that speculative activities can be contagious and spill over across markets specifically we test the hypothesis that during china s warrants bubble period speculative activities in the warrants market grabbed investors attention and caused them to trade more speculatively in the underlying stocks consistent with this hypothesis we find that turnover and return volatility of the underlying stocks are positively associated with the warrants unexpected turnover and price deviation from their fundamental values during the previous day controlling for information driven trading and hedging motives and that such a spillover effect is more pronounced when warrants attract more investor attention data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1914 this paper was accepted by wei xiong finance

international diversification with securitized real estate and the veiling glare from currency risk this paper analyzes diversification benefits from international securitized real estate in a mixed asset context we apply regression based mean variance efficiency tests conditional on currency unhedged and fully hedged portfolios to account for foreign exchange risk exposure from the perspective of a us investor it is shown that first international diversification is superior to a us mixed asset portfolio second adding international real estate to an already internationally diversified stock and bond portfolio results in a further significant improvement of the risk return trade off and third considering unhedged international assets could lead to biased asset allocation decisions not realizing the true diversification benefits from international assets our in sample results are quite robust in out of sample analysis and when investment frictions like short selling constraints are introduced

information about bank risk in options prices abstract the volatility of its share price reflects the volatility of the market value of a bank s assets we present data for the volatilities of individual banks shares that are implied by the prices of options on the banks shares we present evidence that implied volatilities iv s better forecast actual future volatilities of share prices than historical volatilities do banks iv s are correlated with marketwide volatility with the levels of their own share prices with their own subordinated debt yield spreads and with other banks iv s bank capital reduces the response of iv s to market volatility iv s are likely to add information about bank risk that is timely cheap objective and useful