How Do Financing Constraints Affect Firms’ Equity Volatility?

Theory suggests that financing frictions can have significant implications for equity volatility by shaping firms’ exposure to economic risks. This paper provides evidence that an important determinant of higher equity volatility among research and development (R&D)‐intensive firms is fewer financing constraints on firms’ ability to access growth options. I provide evidence for this effect by studying how persistent shocks to the value of firms’ tangible assets (real estate) affect their subsequent equity volatility. The analysis addresses concerns about the identification of these balance sheet effects and shows that these effects are consistent with broader patterns on the equity volatility of R&D‐intensive firms.     

What drives international equity correlations? Volatility or market direction?

We consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets. Using data on the US (as the reference country), Canada, the UK and France equity indices, empirical evidence shows that without taking into account the effect of return, there is an (asymmetric) effect of volatility on correlation. The volatility seems to have an impact on correlation especially during downturn periods. However, once we introduce the effect of return, the impact of volatility on correlation disappears. These observations suggest that, the relation between volatility and correlation is an association rather than a causality. The strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility.     

An investor sentiment barometer — Greek Implied Volatility Index (GRIV)

In this paper, we propose a new measure of Greek equity market volatility based on the prices of FTSE/ATHEX-20 index options. Greek Implied Volatility Index is calculated using the model-free methodology that involves option prices summations and is independent from the Black and Scholes pricing formula. The specific method is applied for the first time in a peripheral and illiquid market as the Athens Exchange.The empirical findings of this paper show that the proposed volatility index includes information about future realized volatility beyond that contained in past volatility. In addition, our analysis indicates that there is a statistically significant negative and asymmetric contemporaneous relationship between the returns of the implied volatility index and the underlying equity index. Finally, the volatility transmission effects on the Greek stock exchange from two leading markets, namely the New York Stock Exchange and the Deutsche Börse, are tested and documented.     

Volatility co-movements between emerging sovereign bonds: Is there segmentation between geographical areas?

This paper analyses the dynamic interrelationship between spreads on selected sovereign bonds issued by 10 emerging countries. It investigates the nature of the volatility transmission in secondary bond markets through conditional covariance estimates obtained by orthogonal methods. This approach, which combines PCA with GARCH volatility modelling, filters away idiosyncratic news and focuses on spreads dynamics driven by common factors. We find convincing evidence of co-movements between spread changes; more within than across geographical areas. Conditional covariations increase in periods of turbulence and subsequently subside. The time-varying minimum variance artificial portfolios, which are used here for model validation, show that, in spite of systemic risk, international portfolio diversification is still a powerful strategy for risk reduction.     

Fundamentals or Managerial Discretion? The Relationship between Accrual Variability and Future Stock Return Volatility

This study extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between accrual variability and firm‐level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current‐period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process.     

Can Time‐Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?

Why is the equity premium so high, and why are stocks so volatile? Why are stock returns in excess of government bill rates predictable? This paper proposes an answer to these questions based on a time‐varying probability of a consumption disaster. In the model, aggregate consumption follows a normal distribution with low volatility most of the time, but with some probability of a consumption realization far out in the left tail. The possibility of this poor outcome substantially increases the equity premium, while time‐variation in the probability of this outcome drives high stock market volatility and excess return predictability.     

Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?

This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of excess volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.     

The Asymmetry and Volatility of the Chinese Stock Market Caused by the “New National Ten”

ABSTRACT

To curb the excessively rapid rise in housing prices in China, the State Council of China promulgated the New National Ten, which restrains speculative investment behavior and has a linkage effect on the stock market. In this study, we use a series of GARCH models to analyze the effect of the New National Ten on the volatility and asymmetry of the Shanghai Composite Index. Specifically, we investigate how changes in investors’ expectations due to regulations affect the stock market. The result clearly illustrates that this policy is effective in stabilizing the stock market. Investors expect a bullish future stock market and only care about the continuing execution of the policy. Finally, policy implications of our findings are discussed.     

Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option

House price volatility; lender and borrower perception of price trends, loan and property features; and the borrower’s put option are integrated in a model of residential mortgage default. These dimensions of the default problem have, to our knowledge, not previously been considered altogether within the same investigation framework. We rely on a sample of individual mortgage loans for 20 counties in Florida, over the period 2001 through 2008, third quarter, with housing price performance obtained from repeat sales analysis of individual transactions. The results from the analysis strongly confirm the significance of the borrower’s put as an operative factor in default. At the same time, the results provide convincing evidence that the experience in Florida is in part driven by lenders and purchasers exhibiting euphoric behavior such that in markets with higher price appreciation there is a willingness to accept recent prior performance as an indicator of future risk. This connection illustrates a familiar moral hazard in the housing market due to the limited information about future prices.     

Comparison of Black–Scholes Formula with Fractional Black–Scholes Formula in the Foreign Exchange Option Market with Changing Volatility

In this paper, the authors discuss the fractional option pricing with Black–Scholes formula, deduce the Fractional Black–Scholes formula, show the empirical results by using China merchants bank foreign exchange call option price, and find when the volatility is smaller, the asymptotic mean squared error of Fractional Black–Scholes is bigger than the Traditional Black–Scholes’, while the volatility is bigger—the market mechanism has a full play, the result is reverse. Namely when the market mechanism is given a full scope, the estimating effect of Fractional Black–Scholes is better than Traditional Black–Scholes’.     

Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification Test for Affine Term Structure Models

We propose using model‐free yield quadratic variation measures computed from intraday data as a tool for specification testing and selection of dynamic term structure models. We find that the yield curve fails to span realized yield volatility in the U.S. Treasury market, as the systematic volatility factors are largely unrelated to the cross‐section of yields. We conclude that a broad class of affine diffusive, quadratic Gaussian, and affine jump‐diffusive models cannot accommodate the observed yield volatility dynamics. Hence, the Treasury market per se is incomplete, as yield volatility risk cannot be hedged solely through Treasury securities.