An Empirical Analysis of the Volatility in the Open-End Fund Market: Evidence from China

This paper applies a set of GARCH models to investigate the three characteristics, including time persistence, leverage effect, and risk premium, of the volatilities of the four China Securities Index (CSI) fund indices. This study made the following four findings: (1) a strong ARCH effect exists in the returns; (2) time persistence is significant in all the CSI fund indices, namely, "stock index," "hybrid index," and "bond index" in descending order of significance; (3) the leverage effect is not statistically significant, yet there may be a positive leverage effect on the bond funds; (4) a risk premium effect exists in the open-end fund market, especially in the bond fund market.     

The importance of the volatility risk premium for volatility forecasting

In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.     

Jump risk,stock returns,and slope of implied volatility smile

In the presence of jump risk, expected stock return is a function of the average jump size, which can be proxied by the slope of option implied volatility smile. This implies a negative predictive relation between the slope of implied volatility smile and stock return. For more than four thousand stocks ranked by slope during 1996–2005, the difference between the risk-adjusted average returns of the lowest and highest quintile portfolios is 1.9% per month. Although both the systematic and idiosyncratic components of slope are priced, the idiosyncratic component dominates the systematic component in explaining the return predictability of slope. The findings are robust after controlling for stock characteristics such as size, book-to-market, leverage, volatility, skewness, and volume. Furthermore, the results cannot be explained by alternative measures of steepness of implied volatility smile in previous studies.     

Volatility dynamics under an endogenous Markov-switching framework: a cross-market approach

This study uses an endogenous Markov-switching framework to examine the interrelatedness of the volatility dynamics of the US and Korean markets. Previous literature assumes that the US market implied volatility index is exogenous to the Korean implied volatility index. Here, we allow for correlations between the US and Korean variables and suggest two types of endogeneity, namely endogeneity in the regressors and in the regime-switching probabilities. The estimation results show that both types of endogeneity are present in the US variables and that the parameter estimates are quite different when endogeneity is considered, indicating a serious endogeneity bias in the parameter estimates. The results of the endogeneity test for the regressors show that the effects of global shocks are often persistent and may last for as long as six periods. Sub-period analyses indicate that the degrees of endogeneity were especially strong during the global financial crisis.     

The Dynamics of the S&P 500 Implied Volatility Surface

This empirical study is motivated by the literature on “smile-consistent” arbitrage pricing with stochastic volatility. We investigate the number and shape of shocks that move implied volatility smiles and surfaces by applying Principal Components Analysis. Two components are identified under a variety of criteria. Subsequently, we develop a “Procrustes” type rotation in order to interpret the retained components. The results have implications for both option pricing and hedging and for the economics of option pricing. This revised version was published online in June 2006 with corrections to the Cover Date.     

波动率风险及风险价格——来自中国A股市场的证据

本文应用Fama-Macbeth估计方法,以1997年2月至2009年6月中国A股股票为样本,考察股票市场波动率风险及其风险价格的特征。研究表明:波动率风险是一个显著的横截面定价因子,其风险价格为负,该结论不受流动性及市场偏度因子、待检资产改变、波动率模型设定的影响;在资产定价模型中引入波动率风险因子有利于解释规模效应和账面市值比效应异象。波动率的风险因子可以涵盖部分宏观经济变量的定价信息,规模因子是波动率风险因子的代理变量。     

Stochastic Volatility With an Ornstein-Uhlenbeck Process: An Extension

In this paper, we reexamine and extend the stochastic volatilitymodel of Stein and Stein (S&S) (1991) where volatility followsa mean–reverting Ornstein–Uhlenbeck process. UsingFourier inversion techniques we are able to allow for correlationbetween instantaneous volatilities and the underlying stockreturns. A closed-form pricing solution for European optionsis derived and some numerical examples are given. In addition,we discuss the boundary behaviour of the instantaneous volatilityat v(t) = 0 and show that S&S do not work with an absolutevalue process of volatility. JEL Classification: G13     

Option Bounds and the Pricing of the Volatility Smile

This paper presents a new approach forthe estimation of the risk-neutral probability distribution impliedby observed option prices in the presence of a non-horizontalvolatility smile. This approach is based on theoretical considerationsderived from option pricing in incomplete markets. Instead ofa single distribution, a pair of risk-neutral distributions areestimated, that bracket the option prices defined by the volatilitybid/ask midpoint. These distributions define upper and lowerbounds on option prices that are consistent with the observableoption parameters and are the tightest ones possible, in thesense of minimizing the distance between the option upper andlower bounds. The application of the new approach to a sampleof observations on the S&P 500 option market showsthat the bounds produces are quite tight, and also that theirderivation is robust to the presence of violations of arbitragerelations in option quotes, which cause many other methods tofail.     

Why do options prices predict stock returns? Evidence from analyst tipping

We study the role of analysts and options traders in the information transmission between options and stock markets. We first show that the predictive power of option implied volatilities (IVs) on stock returns more than doubles around analyst-related events, indicating that a significant proportion of the options predictability on stock returns comes from informed options traders’ information about upcoming analyst-related news. We examine three explanations for this finding: tipping, reverse tipping and common information. We find that analyst tipping to options traders is the most consistent explanation of these predictive patterns.     

The Effects of Trading Methods on Volatility and Liquidity: Evidence from the Taiwan Stock Exchange

This study contrasts the call and continuous auction methods using Taiwan Stock Exchange data. Volatility under the call market method is approximately one-half of that under the continuous auction method. The call market method is more effective in reducing the volatility of high-volume stocks than low-volume stocks. This contradicts conventional wisdom which suggests that the call market method is superior for thinly traded stocks, while the continuous auction method is preferred for heavily traded stocks. The call market method does not impair liquidity and price discovery. The call market appears more efficient than in the continuous auction market.     

Foreign Exchange Market Volatility in Southeast Asia

The time-varying volatility and volatility transmission in Asian foreign exchange markets are investigated in this paper. It has been found that the time-varying volatility and volatility transmission are all prominent in these markets. Moreover, variance simulation is carried out and the structure of covariance matrices examined, revealing the characteristics of Asian foreign exchange markets and offering explanations to the findings.     

Explaining asset pricing puzzles associated with the 1987 market crash

The 1987 market crash was associated with a dramatic and permanent steepening of the implied volatility curve for equity index options, despite minimal changes in aggregate consumption. We explain these events within a general equilibrium framework in which expected endowment growth and economic uncertainty are subject to rare jumps. The arrival of a jump triggers the updating of agents' beliefs about the likelihood of future jumps, which produces a market crash and a permanent shift in option prices. Consumption and dividends remain smooth, and the model is consistent with salient features of individual stock options, equity returns, and interest rates.     

Stock Market Volatility in an Emerging Market: Further Evidence from the Athens Stock Exchange

We investigate the time series properties of the daily and weekly returns from the Athens Stock Exchange (ASE) index for the years 1987 to 1997. We investigate whether important time-series characteristics have changed significantly over time. The Greek market has recently undergone major changes including complete capital flow liberalization, the implementation of computerized trading, as well as significant increases in market volume and capitalization; we thus contrast the 1987–90 and 1991–97 periods. Our findings suggest the dynamics of the ASE composite index returns have changed as the market has developed.     

The Value Premium and Time-Varying Volatility

Abstract:  Numerous studies have documented the failure of the static and conditional capital asset pricing models to explain the difference in returns between value and growth stocks. This paper examines the post-1963 value premium by employing a model that captures the time-varying total risk of the value-minus-growth portfolios. Our results show that the time-series of value premia is strongly and positively correlated with its volatility. This conclusion is robust to the criterion used to sort stocks into value and growth portfolios and to the country under review (the US and the UK). Our paper is consistent with evidence on the possible role of idiosyncratic risk in explaining equity returns, and also with a separate strand of literature concerning the relative lack of reversibility of value firms' investment decisions.     

Volatility linkages of the equity,bond and money markets: an implied volatility approach

This study proposes an alternative approach for examining volatility linkages between Standard & Poor's 500, Eurodollar futures and 30 year Treasury Bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effects are considered and controlled for. I find that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. Furthermore, I replicate the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and find that the results are nearly identical; I conclude that my approach is simple, robust and preferable in practice. I also argue that the results from this paper provide supportive evidence on the information content of implied volatilities in the equity, bond and money markets.