beyond stochastic volatility and jumps in returns and volatility while a great deal of attention has been focused on stochastic volatility in stock returns there is strong evidence suggesting that return distributions have time varying skewness and kurtosis as well under the risk neutral measure for example this can be observed from variation across time in the shape of black scholes implied volatility smiles this article investigates model characteristics that are consistent with variation in the shape of return distributions using a stochastic volatility model with a regime switching feature to allow for random changes in the parameters governing volatility of volatility leverage effect and jump intensity the analysis consists of two steps first the models are estimated using only information from observed returns and option implied volatility standard model assessment tools indicate a strong preference in favor of the proposed models since the information from option implied skewness and kurtosis is not used in fitting the models it is available for dia

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

heterogeneous information arrivals and return volatility dynamics uncovering the long run in high frequency returns recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean reverting fractionally integrated process meanwhile much shorter lived volatility dynamics are typically observed with high frequency intradaily returns the present article demonstrates that by interpreting the volatility as a mixture of numerous heterogeneous short run information arrivals the observed volatility process may exhibit long run dependence as such the long memory characteristics constitute an intrinsic feature of the return generating process rather than the manifestation of occasional structural shifts these ideas are confirmed by our analysis of a one year time series of fiveminute deutschemark u s dollar exchange rates among the most puzzling issues is the behavior of volatility while the general properties of volatility remain elusive perhaps the most intriguing feature revealed by empirical work on volatility is its long persistence such behavior has sparked a search almost akin to that for the holy grail for the perfect garch model but the underlying question of why such volatility persistence endures remains unanswered we conjecture that the ability to analyze higher frequency data may be particularly useful in pursuing this issue goodhart and o hara 1997 the pronounced volatility clustering is arguably one of the most striking features of financial price series recorded at daily or weekly intervals and a large body of literature seeking to characterize this aspect of speculative returns has emerged over the past decade 1 at the same time convincing theoretical explanations for the underlying sources of long run persistence in volatility remain elusive the recent advent of comprehensive high frequency andersen is from the j l kellogg graduate school of management of northwestern university bollerslev is from the university of virginia and is a research associate at the national bureau of economic research we gratefully acknowledge the financial support provided by a research grant from the institute for quantitative research in finance the q group special thanks are due to olsen and associates for making the intradaily exchange rate quotes and reuter s news tape available we have received valuable comments from wake epps clive w j granger stephen f gray j huston mcculloch as well as seminar participants at the december 1996 triangle econometrics workshop the 1997 afa meetings in new orleans academia sinica the wharton school usc and georgetown and york universities we remain fully responsible for the content 1 see bollerslev chou and kroner 1992 for a survey of this literature using arch type

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

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

volatility forecasting with range based egarch models we provide a simple yet highly effective framework for forecasting return volatility by combining exponential generalized autoregressive conditional heteroscedasticity models with data on the range using standard and poor s 500 index data for 1983 2004 we demonstrate the importance of a long memory specification based on either a two factor structure or fractional integration that allows for some asymmetry between market returns and volatility innovations out of sample forecasts reinforce the value of both this specification and the use of range data in the estimation we find substantial forecastability of volatility as far as 1 year from the end of the estimation period contradicting the return based conclusions of west and cho and of christoffersen and diebold that predicting volatility is possible only for short horizons

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

anti dumping what are the numbers to discuss at doha while tariff barriers have decreased worldwide through various gatt rounds anti dumping has surged to play a crucial role as the most important non tariff barrier after much debate and opposition anti dumping is on the agenda of the doha round of multilateral trade negotiations and it is one of the most important issues especially for developing countries as they are the main targets of this policy instrument with this prospect it is important to assess the relevance of anti dumping not only by focusing on traditional users but by analysing the experience of new users which are now major players in the field this paper improves upon existing studies by providing a comprehensive assessment on the use of anti dumping first data on the time pattern of worldwide implementations of anti dumping laws are presented this time profile shows interesting relationships with legal developments in gatt and wto dispositions second usual sources of data are complemented with various other sources this allows the inclusion of recent heavy users like china russia taiwan and ukraine which are ignored in similar studies but important for their trade volumes this enlarged and updated dataset shows that new users are even more important than previously thought with implications for the doha negotiations

malaysia a success story stuck in the middle this study examines the malaysia development record in the context of widespread concerns that the country and others like it may encounter major difficulties in graduating to the ranks of high income economies it stresses the country s rapid socioeconomic development built on openness reasonably competent macroeconomic management and attention to equity issues it then investigates the country s significant slowdown in investment and economic growth since the late 1990s and asks whether this trend is related to the more general graduation issue our principal conclusion is that the slowdown has less to do with the problem of graduation and more to do with a set of country specific institutional and political economy challenges thus the current concern within the country that it is in some sense stuck in the middle points to the need for a set of major policy reforms to accelerate growth

forecasting financial volatilities with extreme values the conditional autoregressive range carr model we propose a dynamic model for the high low range of asset prices within fixed time intervals the conditional autoregressive range model henceforth carr the evolution of the conditional range is specified in a fashion similar to the conditional variance models as in garch and is very similar to the autoregressive conditional duration acd model of engle and russell 1998 extreme value theories imply that the range is an efficient estimator of the local volatility e g parkinson 1980 hence carr can be viewed as a model of volatility out of sample volatility forecasts using the s p500 index data show that the carr model does provide sharper volatility estimates compared with a standard garch model

mcmc analysis of diffusion models with application to finance this article proposes a new method for estimation of parameters in diffusion processes from discrete observations the method is based on markov chain monte carlo methodology and applies to a wide class of models including systems with unobservable state variables and nonlinearities the method is applied to the estimation of parameters in one factor cev interest rate models and a two factor model with a latent stochastic volatility component sv the cev model is found to do a poor job in capturing the time varying volatility interest rate data the sv model provides vastly superior fit to that of the cev model the article also presents a simulation study that demonstrates that the method provides accurate parameter estimates of the sv model at moderate sample sizes

econometric policy evaluation and inverse control the traditional approach to monetary policy evaluation entails a first step in which structural parameters are estimated and a second in which the performance of alternative policy rules is studied this paper combines the two steps of the traditional approach into one by estimating a structural model subject to the restriction that the central bank chooses the policy rule that minimizes expected loss the structure is a forward looking new keynesian model in which equilibrium values of output and inflation depend on expectations of future values of those variables analysis of u s data between 1965 and 2001 support the hypotheses that the sample contains two policy regimes that the fed placed far greater weight on stabilizing inflation after 1980 and that improvements in policy were available in both regimes the unified approach also sharpens estimates of structural parameters

2018 wto trade policy review of malaysia this paper presents an academic analysis and review of the recently completed wto trade policy review tpr of malaysia 2018 this includes suggesting policies that can help to promote malaysia s international competitiveness we show that the sharp decline in commodity prices that started in 2014 contributed in narrowing malaysia s trade balance and current account balance as a share of gdp the faster decline of exports as a share of gdp compared to imports accounted for most of the substantial reduction further the collapse of commodity prices was accompanied by a sharp depreciation of ringgit malaysia we also show that malaysia is losing international attractiveness in terms of fdi inflows relative to its economic size this is evidenced by the downward trend in malaysia s fdi performance index since 1992 further international tourism has fallen on average since 2014 due largely to a drop in tourist arrivals from singapore policymakers should introduce policies to enhance international competitiveness such as reforming the education system to produce skilled workers and reducing reliance on low skilled foreign workers

a note on an interest rate immunization strategy abstract the mechanisms for insuring investments in stocks and bonds against depreciation have grown rapidly in the last decade insuring a portfolio entails managing it in such a way that the left hand tail of the return distribution is truncated the present paper demonstrates how this may be achieved for fixed interest securities discrete time hedging procedures are derived with the inclusion of transaction costs

using daily range data to calibrate volatility diffusions and extract the forward integrated variance a common model for security price dynamics is the continuous time stochastic volatility model for this model hull and white 1987 show that the price of a derivative claim is the conditional expectation of the black scholes price with the forward integrated variance replacing the black scholes variance implementing the hull and white characteriza tion requires both estimates of the price dynamics and the conditional distribution of the forward integrated variance given observed variables using daily data on close to close price movement and the daily range we find that standard models do not fit the data very well and that a more general three factor model does better as it mimics the long memory feature of financial volatility we develop techniques for estimating the conditional distribution of the forward integrated variance given observed variables i introduction

a cyclical model of exchange rate volatility abstract in this paper we investigate the long run dynamics of the intraday range of the gbp usd jpy usd and chf usd exchange rates we use a non parametric filter to extract the low frequency component of the intraday range and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process we use the cyclical volatility model to generate out of sample forecasts of exchange rate volatility for horizons of up to 1 year under the assumption that the long run trend is fully persistent as a benchmark we compare the forecasts of the cyclical volatility model with those of the range based egarch and fiegarch models of brandt and jones 2006 not only does the cyclical volatility model provide a very substantial computational advantage over the egarch and fiegarch models but it also offers an improvement in out of sample forecast performance

domino dumping i competitive exporters when exporting firms face the prospect of voluntary export restraints they have an incentive to export more than with no prospect of a voluntary export restraint since greater exports lead to larger license allocations in the event of a voluntary export restraint export country governments incentives differ leading either to export tax or subsidy depending on the circumstances the prospect of one departure from free trade thus leads to another a domino effect antidumping enforcement will ordinarily not eliminate and ironically may increase dumping copyright 1992 by american economic association

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

an empirical model of daily highs and lows of west texas intermediate crude oil prices there is a large collection of literature on energy price forecasting but most studies typically use monthly average or close to close daily price data in practice the daily price range constructed from the daily high and low also contains useful information on price volatility and is used frequently in technical analysis the interaction between the daily high and low and the associated daily range has been examined in several recent studies on stock price and exchange rate forecasts the present paper adopts a similar approach to analyze the behaviour of the west texas intermediate wti crude oil price over a ten year period we find that daily highs and lows of the wti oil price are cointegrated with the error correction term being closely approximated by the daily price range two forecasting models one based on a vector error correction mechanism and the other based on a transfer function framework with the range taken as a driver variable are presented for forecasting the daily highs and lows the results show that both of these models offer significant advantages over the naive random walk and univariate arima models in terms of out of sample forecast accuracy a trading strategy that makes use of the daily high and low forecasts is further developed it is found that this strategy generally yields very reasonable trading returns over an evaluation period of about two years

malaysian trade policy and the 2001 wto trade policy review the purpose of this paper is two fold to examine developments in trade and investment policy regimes in malaysia following the on set of the financial crisis using the trade policy review malaysia 2001 of the wto as a reference point and to evaluate the review in terms of the objectives of the wto trade policy review mechanism as set out in the marrakesh agreement it is found that by and large malaysia has managed to come out of the crisis without compromising on its long standing commitment to maintaining a relatively open trade and investment policy regime by the regional standards however there are some disturbing post crisis developments which deserve scrutiny in a future review these include increase in the degree of dispersion of tariff rates because of high tariff peaks relating to a few product lines increased reliance on non automatic import licensing to regulate imports of a significant number of products which directly compete with domestic production by public sector enterprises and unexplained delays in meeting commitments under the general agreement on trade in services gats

bond price dynamics and options this paper provides a closed form preference free means of valuing a european call option written on a default free pure discount bond investors may not agree upon a theory of the term structure but they will necessarily agree on equilibrium option values further these equilibrium option values may be obtained without recourse to numerical approximation default free pure discount bond prices were posited to follow a non standardized transformed brownian bridge process this specification implicitly incorporates the terminal constraint that the price of a default free pure discount bond equal its face value at maturity contingent claim valuation necessarily involves consideration of terminal constraints on the value of financial securities the brownian bridge specification permits an appropriate means of incorporating a number of such constraints therefore while this paper has considered only the application of the brownian bridge process to the valuation of debt options the introduction of this process may provide for many further financial applications

new empirical evidence on the bid ask spread in this article we model the determinants of spread for 734 firms listed on the nyse over the period 1 january 1998 to 31 december 2008 we propose a panel data model of the determinants of spread there are four main messages emerging from our work we find a statistically significant effect of volume on spread inconsistent with the work of johnson 2008 on price we find mixed results consistent with the literature on the effect of price volatility on spread our results are completely the opposite of the cross sectional literature but sides with the relatively recent work of chordia et al 2001 we allow for persistence of spread as a determinant of spread and find significant evidence of spread persistence across all 16 sectors finally we examine size effects and find statistically strong evidence of size effects based on the relationship between price and spread persistence and spread and volatility and spread

forecasting currency volatility a comparison of implied volatilities and ar fi ma models we compare forecasts of the realized volatility of the pound mark and yen exchange rates against the dollar calculated from intraday rates over horizons ranging from one day to three months our forecasts are obtained from a short memory arma model a long memory arfima model a garch model and option implied volatilities we find intraday rates provide the most accurate forecasts for the one day and one week forecast horizons while implied volatilities are at least as accurate as the historical forecasts for the one month and three month horizons the superior accuracy of the historical forecasts relative to implied volatilities comes from the use of high frequency returns and not from a long memory specification we find significant incremental information in historical forecasts beyond the implied volatility information for forecast horizons up to one week

modelling squared returns using a setar model with long memory dynamics abstract this paper presents a two regime setar model for the volatility with a long memory process in the first regime and a short memory process in the second regime persistence properties are studied and estimation methods are proposed such a process is applied to stock indices and individual asset prices

malaysia trade policy review 2006 the trade policy review tpr is an important document for small open economies like malaysia it provides an outsider perspective of its trade policies and implementation in this paper we provide an update of the malaysian economy emphasising the degree of competitiveness vis a vis other asian counterparts we also discuss the issue of regional and bilateral trading agreements involving malaysia with a focus on the services sector finally we briefly consider the issue of tariff protection an issue raised by many commentators of the tpr

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

trade policy review malaysia 2010 the paper reviews the recently completed trade policy review for malaysia we find that in the case of malaysia trade has been liberalised and subjected to structural changes to a very high extent over the last three decades however reform has been less effective when it comes to trade related policies such as investment policies and other national policies that de facto rather than de jure affect competition due to differential treatment of different firms brands and individuals this is also mirrored in the faltering levels of investment in malaysia an area where malaysia has been successful is the reorientation towards services a good example is the tourism industry which is mature and a major export industry in malaysia today nascent service industries such as health finance ict related services and education hold promise to become important export earners in the future the paper shows that for this new phase of structural change to be truly successful malaysia must prioritise trade negotiations and integration with her own region and especially asean

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

effective protection policy appraisal and trade policy reform when the effective protection concept was rst developed it was widely regarded as a key widely used especially in the context of policy reform and policy appraisal in developing countries this paper re appraises tmeasure of the structure of protection and became widely deployed it was however subject to a he concept reviews the extent of its application and discusses the factors behind its longevity as an investigative tool the theoretical critique on the grounds that it was essentially a partial equilibrium measure which could not be easily embedded ipaper concludes that the measure still has a role to play in evaluating the structure of protection n a general equilibrium framework notwithstanding this critique the concept has continued to be

antidumping and retaliation threats abstract we propose and test two ways in which retaliation threats may dampen the antidumping ad activity we observe first the threat of retaliatory ad actions may make a domestic industry less likely to name a foreign import source in an ad petition second the prospect of a gatt wto trade dispute may make government agencies less likely to rule positive in their ad decision using a nested logit framework we find evidence that both retaliation threats substantially affect us ad activity from 1980 through 1998

anti dumping a growing problem in international trade this paper discusses the issue of anti dumping ad proliferation ad is used more frequently by more countries and against more products than ever in its history i review ad filing patterns with an emphasis on the scope of countries and industries seeking protection recent trends suggest that the widespread embrace of ad protection makes the prospect for ad reform increasingly unlikely ad is no longer being used solely by high income developed countries it is increasingly being used by middle income and even lower income countries new users have chosen to use ad very intensively per dollar of imports the new users have filed ad cases up to 15 20 times more frequently than the traditional ad users such as the us and eu the evolving set of ad users complicates ad negotiations in the near term strong opposition by the us and eu makes reform a highly unlikely outcome in the longer run rising use of ad against the us and eu could conceivably weaken their support for ad yet the same trends that might finally cause the us and eu to realise ad is a failed policy will likely make reform impossible

variances of security price returns based on high low and closing prices in a recent paper garman and klass 1980 studied the problem of estimating capital asset price volatility parameters developing an idea first introduced by parkinson 1980 they argue that improved volatility measures can be obtained by taking into account the daily high low and opening prices in addition to the traditionally used closing prices this paper is concerned mainly with testing the empirical validity of different volatility estimators based on high low and closing prices

growth structural change and plantation tree crops the case of rubber abstract the effects of advancing economic growth on plantations are classed in five stages starting with conditions in a backward subsistence economy and ending under circumstances where manufacturing is dominant and planting tree crops no longer economic changes in relative resource prices and other factors and consequent adjustments of estates and smallholdings are taken into account doing this in light of international experiences with such crops the case of natural rubber is scrutinized in depth comparing economic effects and responses at each stage in chief producing countries the key elements in plantation adjustments of market conditions technology institutional arrangements and government interventions are finally addressed with policies likely to facilitate appropriate modifications being indicated

the information content of implied volatility in developed versus developing fx markets abstractthis article predicts the daily movement of monthly foreign exchange fx rate volatility using a linear combination of a time series model and implied volatilities from options the focus is on analysing the fx volatilities in three developing economies the brazilian real brl the indian rupee inr and the russian ruble rub against the us dollar usd the empirical exercise utilizes two time series models mixed data sampling midas and garch the analysis indicates that for both developed and developing economies the predictive power of midas and that of garch is comparable further on in this article we will ascertain whether the relationship between realized and implied volatility is fundamentally different in the case of developing economies from that among developed economies thus we compare the pairs usd brl usd inr and usd rub against euro usd and usd japanese yen to determine the information content and predictive power of implied volatilities plots of the midas coefficients