Structural breaks and GARCH models of stock return volatility: The case of South Africa

This paper investigates the empirical relevance of structural breaks in forecasting stock return volatility using both in-sample and out-of-sample tests applied to daily returns of the Johannesburg Stock Exchange (JSE) All Share Index from 07/02/1995 to 08/25/2010. We find evidence of structural breaks in the unconditional variance of the stock returns series over the period, with high levels of persistence and variability in the parameter estimates of the GARCH(1,1) model across the sub-samples defined by the structural breaks. This indicates that structural breaks are empirically relevant to stock return volatility in South Africa. However, based on the out-of-sample forecasting exercise, we find that even though there structural breaks in the volatility, there are no statistical gains from using competing models that explicitly accounts for structural breaks, relative to a GARCH(1,1) model with expanding window. This could be because of the fact that the two identified structural breaks occurred in our out-of-sample, and recursive estimation of the GARCH(1,1) model is perhaps sufficient to account for the effect of the breaks on the parameter estimates. Finally, we highlight that, given the point of the breaks, perhaps what seems more important in South Africa, is accounting for leverage effects, especially in terms of long-horizon forecasting of stock return volatility.     

A Generalized Simple Formula to Compute the Implied Volatility

This paper provides a direct method of obtaining an accurate estimate of the implied volatility of a call option. It adds a quadratic adjustment term to an already-known formula for at-the-money calls, previously developed by Brenner and Subrahmanyam [3]. The adjusted formula is quite accurate for options no more than 20 percent in- or out-of-the-money and is simple to program and compute.     

Dividend Forecast Biases in Index Option Valuation

Since the early days of option pricing theory,the assumption that the dividends on the underlying stock or index over the life of the contract are known has not been challenged. We examine the sensitivity of index option prices to the assumption of dividend uncertainty. We consider a number of issues related to the forecasting of dividends and build a dividend forecasting model that passes several rigorous tests for unbiasedness. We then generate option prices using contemporary market levels and interest rates. We find that prices generated with the actual dividends are unbiased with respect to those generated using the forecasted dividends. The magnitudes of the forecast errors, however, are sufficiently large to suggest a concern, but the percentage errors are consistently small, typically amounting to less than two percent of the option price. We conclude that the convenient assumption that the stream of future dividendsis known is probably innocuous. This revised version was published online in November 2006 with corrections to the Cover Date.     

The interpreter as researcher: ethical heritage interpretation in Indigenous contexts

ABSTRACT

This paper integrates Indigenous research and heritage interpretation scholarship by addressing how interpretation should be underpinned by research congruent with Indigenous expectations for research ethics and methods. Program research and delivery is a profound exercise of power, for interpreters mold public opinion. In a settler-colonial or Indigenous context, critically analyzing sources for one’s interpretative programs and media is particularly imperative, as Western researchers have historically been on colonialism’s front lines. The interpretation of Indigenous themes is fraught with difficulties, but existing interpretation literature myopically focuses on program delivery and evaluation methods. More attention must be paid by interpreters to the problems of relying on Western, positivist research in Indigenous contexts. This paper considers Indigenous research methods and ethics, provides an overview of the connection between Western knowledge and colonialism, and demonstrates the problems this poses for interpreters working with Indigenous content. I offer concrete suggestions for staff to improve their engagement with Indigenous peoples. Ultimately, I argue, interpreters must become more critical of themselves and their sources to successfully address Indigeneity.     

BOUNDARY CONDITION TESTS OF BID AND ASK PRICES OF INDEX CALL OPTIONS

Boundary conditions are established and tested for call options on the S&P 100 Index. The data consist of daily closing bid and ask quotes for the first four months of 1984. Four types of tests—the immediate exercise, European lower bound, vertical spread, and butterfly spread (convexity rule)—are performed on both an immediate and delayed execution basis. Violations are infrequent and those that occur tend to reverse by the end of the following day. Index options, therefore, are priced consistently with rational boundary conditions.     

Private Information and the Exercise of Executive Stock Options

This paper finds strong evidence that executives use private information when exercising their stock options. The most informed executives tend to exercise early, do not exercise on the vest date, do not exercise to capture dividends, exercise a high percentage of their options, and exercise when the option is the least in‐the‐money. We also find that exercises around resignation and retirement are followed by significant negative abnormal returns. Furthermore, the operating performance of firms following exercises motivated by private information is significantly worse than that of firms in which the exercises are not motivated by private information.     

Market index depository liabilities: Analysis,interpretation, and performance

This paper examines a new financial instrument, the market index CD. This deposit offers an interest rate equal to a specified fraction of the change in the stock market over the life of the CD with a guaranteed minimum. We present a pricing formula, an examination of the effects of underlying variables, an evaluation of the early redemption feature, empirical results on the historical performance, and a discussion of some issues suggested by the introduction of this product.