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

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

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

productivity and unemployment over the business cycle abstract the low correlation between cyclical unemployment and productivity over the post war period hides a large sign switch in the mid 1980s from significantly negative the correlation became significantly positive using a search model of unemployment with nominal rigidities and variable labor effort i show that technology shocks can generate a positive unemployment productivity correlation whereas non technology shocks i e aggregate demand shocks tend to do the opposite in this context i identify two events that can quantitatively explain the increase in the correlation i a sharp drop in the volatility of non technology shocks in the mid 1980s and ii a decline in the response of productivity to non technology shocks which from procyclical became acyclical in the last 25 years

tying in two sided markets with multi homing this paper analyzes the effects of tying on market competition and social welfare in two sided markets when economic agents can engage in multi homing by participating in multiple platforms to reap maximal network benefits the model shows that tying induces more consumers to multi home and makes platform specific exclusive content available to more consumers which is beneficial to content providers as a result tying can be welfare enhancing if multi homing is allowed even in cases where its welfare impacts are negative in the absence of multi homing the analysis thus can have important implications for recent antitrust cases in industries where multi homing is prevalent

platform competition in two sided markets many if not most markets with network externalities are two sided to succeed platforms in industries such as software portals and media payment systems and the internet must get both sides of the market on board accordingly platforms devote much attention to their business model that is to how they court each side while making money overall this paper builds a model of platform competition with two sided markets it unveils the determinants of price allocation and end user surplus for different governance structures profit maximizing platforms and not for profit joint undertakings and compares the outcomes with those under an integrated monopolist and a ramsey planner jel l5 l82 l86 l96

okun s law theoretical foundations and revised estimates okun s law has been accepted as an empirical regularity that predicts a 3 percentage point increase in output for every 1 point reduction in the unemployment rate but only because other facts such as weekly hours induced labor supply and productivity tend to rise as well when output gaps are estimated for the u s economy with a production function approach using two different data sets for potential output and nairu it is found that the marginal contribution of a 1 point reduction in unemployment is only about two thirds percent increase in output changes in weekly hours and capacity utilization have independent effects on the output gap copyright 1993 by mit press

okun s law and productivity innovations a long tradition in macroeconomics dating back to arthur okun 1965 and walter oi 1962 regards cyclical productivity fluctuations as an artifact a residual generated from the incomplete and lagged response of employment and labor hours to demand driven fluctuations in real output in okun s version a one percent decline in output relative to trend is divided up into a reduction of 1 3 point in productivity and 2 3 point in aggregate hours the latter is further subdivided into a reduction of 1 3 point in the employment rate with the remaining adjustment taking the form of lower hours per employee and in the labor force participation rate hereafter lfpr yet this tradition of regarding cyclical productivity fluctuations as a byproduct of demand driven output cycles has been almost forgotten over the past three decades as a result of widespread adoption of the real business cycle rbc model in which productivity shocks are treated as exogenous as unexplained as unrelated to aggregate demand and as the sole driver of business cycles even in the more enlightened modern macro work on dynamic stochastic general equilibrium models aggregate demand and sticky prices have reappeared but most recent papers still include an autonomous technology shock as one of several causes of short term business cycle fluctuations revisiting and rethinking the business cycle

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

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

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

bargaining in competing supply chains with uncertainty abstract substantial literature has been devoted to supply chain coordination the majority of this literature ignores competition between supply chains moreover a significant part of this literature focuses on coordination that induce the supply chain members to follow strategies that produce the equilibria chosen by a vertically integrated supply chain this paper investigates the equilibrium behavior of two competing supply chains in the presence of demand uncertainty we consider joint pricing and quantity decisions and competition under three possible supply chain strategies vertical integration vi manufacturer s stackelberg ms and bargaining on the wholesale price bw is the bargaining parameter over a single or infinitely many periods we show that in contrast to earlier literature using vivi vi in both chains is the unique nash equilibrium over one period decision while using msms or bw bw may be nash equilibrium over infinitely many periods

tying and freebies in two sided markets abstract in two sided markets where platforms are constrained to set non negative prices tying can be deployed by platforms as a tool to introduce implicit subsidies for a monopoly this raises participation and benefits consumers on both sides in a duopoly tying on one side makes a platform more or less competitive on the other side depending on externalities tying may not be ex ante optimal while the competing platform may benefit from it the impact on consumers surplus depends on whether competition is softened or intensified on the profitable side moreover tying increases total welfare if network effects are strong

chicken and egg competition among intermediation service providers we analyze a model of imperfect price competition between intermediation service providers we insist on features that are relevant for informational intermediation via the internet the presence of indirect network externalities the possibility of using the nonexclusive services of several intermediaries and the widespread practice of price discrimination based on users identity and on usage efficient market structures emerge in equilibrium as well as some specific form of inefficient structures intermediaries have incentives to propose non exclusive services as this moderates competition and allows them to exert market power we analyze in detail the pricing and business strategies followed by intermediation services providers copyright 2003 by the rand corporation

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

realized garch a joint model for returns and realized measures of volatility summary we introduce a new framework realized garch for the joint modeling of returns and realized measures of volatility a key feature is a measurement equation that relates the realized measure to the conditional variance of returns the measurement equation facilitates a simple modeling of the dependence between returns and future volatility realized garch models with a linear or log linear specification have many attractive features they are parsimonious simple to estimate and imply an arma structure for the conditional variance and the realized measure an empirical application with dow jones industrial average stocks and an exchange traded index fund shows that a simple realized garch structure leads to substantial improvements in the empirical fit over standard garch models that only use daily returns copyright 2011 john wiley sons ltd

can the baseline search and matching model quantitatively explain okun s law okun s law is an empirically observed negative relationship between changes in an economy s unemployment rate and its growth rate of output the baseline search and matching model with stochastic labour productivity fails to match the okun s coefficient because it generates a too low unemployment volatility and a too high correlation between labour productivity and unemployment the model is capable of matching the coefficient if it is extended with an addition of employment separation shocks plus a high calibrated value of nonmarket activities this article also shows that changes in the stochastic properties of exogenous shocks could explain changes in the okun s coefficient in the great moderation 1984 2007

tails fears and risk premia we show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new investor fears index the index reveals large time varying compensation for fears of disasters our empirical investigations involve new extreme value theory approximations and high frequency intraday data for estimating the expected jump tails under the statistical probability measure and short maturity out of the money options and new model free implied variation measures for estimating the corresponding risk neutral expectations

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

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

does the option market produce superior forecasts of noise corrected volatility measures this paper presents a comprehensive empirical evaluation of option implied and returns based forecasts of volatility in which recent developments related to the impact on measured volatility of market microstructure noise are taken into account the paper also assesses the robustness of the performance of the option implied forecasts to the way in which those forecasts are extracted from the option market using a test for superior predictive ability model free implied volatility which aggregates information across the volatility smile and at the money implied volatility which ignores such information are both tested as benchmark forecasts the forecasting assessment is conducted using intraday data for three dow jones industrial average djia stocks and the s p500 index over the 1996 2006 period with future volatility proxied by a range of alternative noise corrected realized measures the results provide compelling evidence against the model free forecast with its poor performance linked to both the bias and excess variability that it exhibits as a forecast of actual volatility the positive bias in particular is consistent with the option market factoring in a substantial premium for volatility risk in contrast implied volatility constructed from liquid at the money options is given strong support as a forecast of volatility at least for the djia stocks neither benchmark is supported for the s p500 index importantly the qualitative results are robust to the measure used to proxy future volatility although there is some evidence to suggest that any option implied forecast may perform less well in forecasting the measure that excludes jump information namely bi power variation

two sided markets a progress report the paper provides a road map to the burgeoning literature on two sided markets and presents new results it identifies two sided markets with markets in which the structure and not only the level of prices charged by platforms matters the failure of the coase theorem is necessary but not sufficient for two sidedness the paper builds a model integrating usage and membership externalities that unifies two hitherto disparate strands of the literature emphasizing either form of externality and obtains new results on the mix of membership and usage charges when price setting or bargaining determine payments between end users

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

forecasting the good and bad uncertainties of crude oil prices using a har framework abstract good or bad uncertainty is the volatility that is associated with positive or negative innovations to asset prices this paper proposes new heterogeneous autoregressive type har type models to forecast the good and bad uncertainties of crude oil prices in this paper we investigate the effects of lagged bad and good uncertainties daily positive and negative signed jump variations and leverages on predicting good and bad uncertainties by in sample and out of sample analysis the in sample results show that bad and good uncertainties have long memory property and the predictability of long term good and bad uncertainties is stronger than that of short and mid term good and bad uncertainties the out of sample results indicate that lagged bad or good uncertainties daily positive signed jump variation and daily negative signed jump variation contain incremental out of sample information for forecasting good or bad uncertainties and in most cases lagged leverages also play indispensable roles in forecasting the good and bad uncertainties in the crude oil market moreover the results of out of sample analysis remain robust across using the other estimation window other har type models and the other sample

realized volatility forecasting in the presence of time varying noise observed high frequency financial prices can be considered as having two components a true price and a market microstructure noise perturbation it is an empirical regularity coherent with classical market microstructure theories of price determination that the second moment of market microstructure noise is time varying we study the optimal from a finite sample forecast mean squared error mse standpoint frequency selection for realized variance in linear variance forecasting models with time varying market microstructure noise we show that the resulting sampling frequencies are generally considerably lower than those that would be optimally chosen when time variation in the second moment of the noise is unaccounted for these optimal lower frequencies have the potential to translate into considerable out of sample mse gains when forecasting using high frequency variance estimates we recommend treating the relevant frequency as a parameter and evaluating it jointly with the parameters of the f

how relevant is volatility forecasting for financial risk management it depends if volatility fluctuates in a forecastable way volatility forecasts are useful for risk management hence the interest in volatility forecastability in the risk management literature volatility forecastability however varies with horizon and different horizons are relevant in different applications moreover existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model and the results can vary not only with the horizon but also with the assumed model to address this problem we develop a model free procedure for assessing volatility forecastability across horizons perhaps surprisingly we find that volatility forecastability decays quickly with horizon volatility forecastability although clearly of relevance for risk management at the short horizons relevant for say trading desk management may be much less important at longer horizons

regulating platform competition in two sided markets under the o2o era abstract online to offline o2o services permeate our daily life and consumption along with the advanced technology in e commerce in this study motivated by taxi hailing market case we analyze the effect of government regulations on competition in two sided markets featured network externality under the o2o era first a model with hotelling specification is formulated to describe the competition in taxi hailing markets using subsidies as decision variables in the model platforms subsidize two sides agents labeled drivers and passengers and the subsidies are given based on whether a state of membership or every transaction second government regulations are introduced into the model by adding corresponding modification into agents utility and new consequent market equilibriums are compared with the benchmark status major findings of this work include i the effects of price adjustments regulation depend largely on relative size of mutual network externalities which causes a negative impact on social welfare except for extreme size level ii butt joint with official platforms brings down platforms cost in both sides so that companies make more profits where social welfare including consumer surplus and profits increases iii forbiddance setting in time limited usage scarifies a little economic effectiveness to ensure better safety