A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead‐lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse‐response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5‐minute intervals, we find that the relationship is return‐driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.     

Treasury Bond Volatility and Uncertainty about Monetary Policy

We show that dispersion‐based uncertainty about the future course of monetary policy is the single most important determinant of Treasury bond volatility across all maturities. The link between Treasury bond volatility and uncertainty about macroeconomic variables is much stronger than for the more traditional time series measures of macroeconomic volatility and adds beyond the information contained in lagged bond market volatility. Uncertainty about monetary policy subsumes the uncertainty about future inflation (consumer price index and the deflator) and economic activity (unemployment, real and nominal gross domestic product and industrial production). In addition, causality clearly runs one way: from monetary policy uncertainty to Treasury bond volatility.     

Corporate taxes,strategic default,and the cost of debt

The current US tax code’s loss carry provisions provide implicit tax subsidies to financially troubled firms. Since shareholders ultimately decide when to announce bankruptcy, such tax subsidies can incentivize them to strategically postpone default. Therefore, corporate taxation can influence corporate cost of debt. Using a large panel of corporate bonds, we find supporting evidence: credit spreads become smaller as tax loss carries grow larger. In contrast, tax shields such as depreciation, which limit loss carry gains, lead to wider spreads. Interestingly, when stockholders hold greater bargaining power – due to large managerial ownership – larger corporate tax shields lead to even narrower credit spreads.     

Credit Spread Changes and Equity Volatility: Evidence from Daily Data

We investigate the determinants of daily changes in credit spreads in the U.S. corporate bond market. Using a sample of liquid investment grade and high‐yield bonds, we show that both systematic bond and stock market factors as well as idiosyncratic equity market factors affect changes in the yield spread at the daily frequency. In particular, we find that increase in stock market volatility has a positive effect on changes in the spread of corporate bonds over the corresponding Treasuries beyond that captured by standard term structure variables. Our results show that there is an almost contemporaneous inverse relationship between changes in the bond yield spread and the stock return of the issuing firm.     

The Corporate Governance Premium,Returns, and Mutual Funds

Mutual funds with a preference for strong corporate governance (CG) have performance similar to mutual funds with a preference for weak CG. We find a direct relation between overall mutual fund CG preference and the corporate governance premium (CGP). Furthermore, the investment preferences of mutual funds forecast the change in the CGP. We provide evidence that the investment activities of institutional investors can affect stock performance, and that shifts by institutional investors in CG preference impact the appearance of the CGP.     

Volatility components, leverage effects, and the return-volatility relations

This paper investigates the risk-return trade-off by taking into account the model specification problem. Market volatility is modeled to have two components, one due to the diffusion risk and the other due to the jump risk. The model implies Merton’s ICAPM in the absence of leverage effects, whereas the return-volatility relations are determined by interactions between risk premia and leverage effects in the presence of leverage effects. Empirically, I find a robust negative relationship between the expected excess return and the jump volatility and a robust negative relationship between the expected excess return and the unexpected diffusion volatility. The latter provides an indirect evidence of the positive relationship between the expected excess return and the diffusion volatility.     

DYNAMIC HEDGE FUND STYLE ANALYSIS WITH ERRORS‐IN‐VARIABLES

We revisit the traditional return‐based style analysis in the presence of time‐varying exposures and errors‐in‐variables (EIV). We apply a benchmark selection algorithm using the Kalman filter and compute the estimated EIV of the selected benchmarks. We adjust them by subtracting their EIV from the initial return series to obtain an estimate of the true uncontaminated benchmarks. Finally, we run the Kalman filter on these adjusted regressors. Analyzing EDHEC alternative index styles, we show that this technique improves the factor loadings and allows more precise identification of the return sources of the considered hedge fund strategy.     

基本养老保险基金投资、股票收益率与股价波动性

以2017—2022年各季度基本养老保险基金投资数据为样本,考察基本养老保险基金投资对股票收益率与股价波动性的影响。结果显示：基本养老保险基金持股比例变化对股票未来收益率有一定预测效应,持股比例增加会加剧股价波动。异质性检验表明,被持股公司规模越大,持股比例变化对股票收益率的影响越不明显,对股价波动性影响的时滞性越强。对于短期持股而言,持股比例增加会加剧股价波动,而对于长期持股而言,持股比例增加有利于稳定股价。鉴于此,应继续推动基本养老保险基金全国统筹,进一步扩大其市场化投资规模、延长投资考核期限,提升基金可持续发展能力。     

Conditional Properties of Hedge Funds: Evidence from Daily Returns*

Using daily returns on a set of hedge fund indices, we study (i) the properties of the indices' conditional density functions and (ii) the presence of asymmetries in conditional correlations between hedge fund indices and other investments and between hedge fund indices themselves. We use the SNP approach to obtain estimates of conditional densities of hedge fund returns and then proceed to examine their properties. In general, a nonparametric GARCH(1,1) model appears to provide the best fit for all strategies. We find that the conditional third and fourth moments are significantly affected by changes in the current volatility of returns on hedge fund indices. We examine changes in the conditional probability of tail events and report significant changes in the probability of extreme events when the conditioning information changes. These results have important implications for models of hedge fund risk that rely on probability of tail events. We formally test for the presence of asymmetries in conditional correlations to determine if there is contagion between hedge funds and other investments and between various hedge fund indices in extreme down markets versus extreme up markets. We generally do not find strong evidence in support of asymmetric correlations.     

A Tale of Two Anomalies: Higher Returns of Low‐Risk Stocks and Return Seasonality

Prior studies have shown that low beta and low volatility stocks earn higher average returns than high beta and high volatility stocks, contradicting the prediction of the capital asset pricing model and the fundamental relationship between risk and return. In this paper, we demonstrate that this phenomenon is driven by the seasonality of stock returns. We show that the risk‐return tradeoff does hold in the nonsummer months, and that switching to a portfolio of low‐risk stocks in summer outperforms—both in terms of absolute and in risk‐adjusted returns—buy and hold strategies as well as the Sell in May strategy of switching to treasury bills in summer.     

Trading and Investing in Volatility Products

Since the banking crisis the market for volatility exchange‐traded products has developed rapidly as it opens to clients beyond the large institutional investor pool. Speculation is driven by increasingly complex leveraged and inverse exposures including those that attempt to trade on significant roll costs in volatility futures curves. Longer‐term investors use these products for the purposes of equity diversification, driven by fears of an ongoing Eurozone crisis. We survey the burgeoning academic literature in this area and present a comprehensive and up‐to‐date comparison of the market and statistical characteristics of European and US exchange‐traded volatility products.     

The Effect of Solicitation and Independence on Corporate Bond Ratings

Abstract:   This comparison of solicited and independent bond rating agencies performance reveals that the ratings assigned by Moody's and Standard & Poor's are consistently lower than those assigned by Duff and Phelps and Fitch IBCA and are consistently higher than those assigned by MCM. While Moody's and S&P generally downgrade bond ratings sooner than Duff and Phelps and Fitch IBCA, the four major agencies upgrade at the same time. Moody's tends to have a higher upgrade magnitude than Duff and Phelps, but the downgrade magnitudes do not differ. MCM upgrades its ratings more quickly than either Moody's or S&P. The results give support to the timeliness and accuracy of ratings provided by the independent agencies.     

Volatility Risk Premium,Risk Aversion,and the Cross‐Section of Stock Returns

We test if innovations in investor risk aversion are a priced factor in the stock market. Using 25 portfolios sorted on book‐to‐market and size as test assets, our new factor together with the market factor explains 64% of the variation in average returns compared to 60% for the Fama‐French model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are augmented to the test assets.     

Volatility risk and the value premium: Evidence from the French stock market

This paper documents that systematic volatility risk is an important factor that drives the value premium observed in the French stock market. Using returns on at-the-money straddles written on the CAC 40 index as a proxy for systematic volatility risk, I document significant differences between volatility factor loadings of value and growth stocks. Furthermore, when markets are classified into expected booms and recessions, volatility factor loadings are also time-varying. When expected market risk premium is above its average, i.e. during expected recessions, value stocks are seen riskier than their growth counterparts. This implies in bad times, investors shift their preferences away from value firms. Instead they use growth stocks as hedges against deteriorations in their wealth during those times. The findings are in line with the predictions of rational asset pricing theory and support a “flight-to-quality” explanation.     

Corporate derivatives use and the cost of equity

We investigate the relation between derivatives use and corporations’ cost of equity capital. Using a large sample of non-financial firms, we compute and analyze (i) the relative cost of equity of firms that use derivatives and those that do not; and (ii) the change in cost of equity experienced by firms initiating derivatives programs. We find that the cost of equity of derivatives users is lower than non-users by 24-78 basis points. Our results are robust to specifications that account for potential endogeneity related to a firm’s derivatives use and capital structure decisions. We further find that the reduction in the cost of equity is attributable to both lower market beta and SMB beta, suggesting that firms use derivatives to reduce their financial distress risk and that this distress risk has a systematic component that is priced in the market. Finally, the observed reductions in the cost of equity tend to be largest for smaller firms and for firms utilizing currency and interest rate derivatives.     

Returns and option activity over the option-expiration week for S&P 100 stocks

For S&P 100 stocks, we find that the weekly returns over option-expiration (OE) weeks (a month’s third-Friday week) tend to be high, relative to: (1) the third-Friday weekly returns of other stocks with less option activity, (2) the own stock’s other weekly returns, (3) the risk, based on asset-pricing alphas. For these same stocks, a month’s fourth-Friday weekly returns underperform modestly. We suggest the following two avenues are likely partial contributors towards understanding these return patterns: (1) delta-hedge rebalancing by option market makers, with a reduction in short-stock hedge positions over the OE week, and (2) declining risk perceptions over the OE week, as measured by option-derived implied volatilities. Our findings suggest option activity can induce reliable patterns in the weekly returns of option-active large-cap stocks.     

Price Momentum and Idiosyncratic Volatility

We find that returns to momentum investing are higher among high idiosyncratic volatility ( IVol) stocks, especially high IVol losers. Higher IVol stocks also experience quicker and larger reversals. The findings are consistent with momentum profits being attributable to underreaction to firm‐specific information and with IVol limiting arbitrage of the momentum effect. We also find a positive time‐series relation between momentum returns and aggregate IVol. Given the long‐term rise in IVol, this result helps explain the persistence of momentum profits since Jegadeesh and Titman's (1993) study.     

Bayesian inference for issuer heterogeneity in credit ratings migration

Rating transition matrices for corporate bond issuers are often based on fitting a discrete time Markov chain model to homogeneous cohorts. Literature has documented that rating migration matrices can differ considerably depending on the characteristics of the issuers in the pool used for estimation. However, it is also well known in the literature that a continuous time Markov chain gives statistically superior estimates of the rating migration process. It remains to verify and quantify the issuer heterogeneity in rating migration behavior using a continuous time Markov chain. We fill this gap in the literature. We provide Bayesian estimates to mitigate the problem of data sparsity. Default data, especially when narrowing down to issuers with specific characteristics, can be highly sparse. Using classical estimation tools in such a situation can result in large estimation errors. Hence we adopt Bayesian estimation techniques. We apply them to the Moodys corporate bond default database. Our results indicate strong country and industry effects on the determination of rating migration behavior. Using the CreditRisk+ framework, and a sample credit portfolio, we show that ignoring issuer heterogeneity can give erroneous estimates of Value-at-Risk and a misleading picture of the risk capital. This insight is consistent with some recent findings in the literature. Therefore, given the upcoming Basel II implementation, understanding issuer heterogeneity has important policy implications.     

Sarbanes-Oxley Act and corporate credit spreads

Stock market reaction suggests that despite improved disclosure and increased accountability, Sarbanes-Oxley Act (SOX) is too costly and not beneficial. Noting that bondholders are likely to reap the many potential benefits of SOX without bearing the brunt of costs, we examine how SOX affected corporate credit spreads to better assess its benefits. SOX has led to a significant structural decline in spreads of at least 27 basis points. Riskier firms (low rating, long maturity, high leverage, and small size) and firms closely related to SOX major provisions (earning variability, managerial trading, and corporate governance) experience greater declines in spreads.     

Predictability of currency carry trades and asset pricing implications

This paper studies the time series predictability of currency carry trades, constructed by selecting currencies to be bought or sold against the US dollar, based on forward discounts. Changes in a commodity index, currency volatility and, to a lesser extent, a measure of liquidity predict in-sample the payoffs of dynamically re-balanced carry trades, as evidenced by individual and joint p-values in monthly predictive regressions at horizons up to six months. Predictability is further supported through out-of-sample metrics, and a predictability-based decision rule produces sizable improvements in the Sharpe ratios and skewness profile of carry trade payoffs. Our evidence also indicates that predictability can be traced to the long legs of the carry trades and their currency components. We test the theoretical restrictions that an asset pricing model, with average currency returns and the mimicking portfolio for the innovations in currency volatility as risk factors, imposes on the coefficients in predictive regressions.