Uncertainty and the volatility forecasting power of option-implied volatility

This study investigates the impact of uncertainty on the volatility forecasting power of option-implied volatility. Option-implied volatility is a powerful predictor of future volatility, particularly during periods of high uncertainty. This is consistent with option-implied volatility being largely determined by volatility-informed traders (rather than directional traders) when uncertainty is high. New volatility forecasting models that incorporate such interaction outperform benchmark models, both in- and out-of-sample. The new models also better predict future volatility during the 2008 global financial crisis, for which benchmark models perform poorly. The results are robust to alternative choices of benchmark models, loss functions, and estimation windows.     

教育质量波动性对住宅价格的影响研究

“学区房热”源于优质教育资源总量不足、学区间教育质量分布不均。通过分离家庭的学区房购置时刻与住房教育价值实现时刻,区分家庭在事前与事后对住宅附加教育收益的不同评估方式,从微观视角分析学区教育质量波动性的不同是导致择校现象和学区房溢价的另一方面原因。为减轻教育质量波动性给义务教育入学环境带来的负面影响,推动绩效公开、持续投入资源、发展一贯制教育是可行的教育调控政策。该发现还可推广于其他具有质量波动性的公共服务,提示在城市建设时应降低这些设施与服务的质量风险,以便从全方位稳定住宅市场价格。     

Guest worker programs: A theoretical analysis of welfare of the host and source countries*

This article examines the interaction between migration policies of the host and source countries in the context of a model of guest-worker migration. For the host, the objective is to provide low-cost labor for its employers while avoiding illegal immigration. It optimizes over these objectives by setting the time limit of a guest-worker permit. The source country seeks remittance flows and return migration by offering fiscal benefits to returnees. Within this framework, we solve for the Nash equilibrium values of the migration policy instruments and compare them, to the extent possible, with the ones that emerge in a cooperative setting.     

Identifying macro-determinants of remittance flows to a developing country: The case of Uganda

This paper employs minimum Lagrange Multiplier (LM) unit root tests for endogenous structural breaks combined with ARCH and GARCH models to investigate how key macrovariables impact diaspora remittances. Since remittances can reverse-cause exchange rate movements and domestic income, we use changes in the world price of oil denominated in U.S. dollars to proxy movements in the Uganda shilling nominal effective exchange rate. To control for endogenous bias between remittances and income, we use rainfall shocks as proxies for income shocks in a non-oil-producing developing economy dominated by agricultural sector and its related activities. In addition, large movements in oil price and rainfall shocks typically cause large supply shocks that can significantly impact size of remittance inflows. We control for interest rate differential, political business cycles and seasonality. Results indicate that accounting for structural change in intercepts (levels) and slopes (trends) of key macroeconomic determinants of remittances around their major structural break points significantly increases their explanatory power. In particular, positive (negative) innovations in income and depreciation (appreciation) in the currency of a recipient developing country are negatively (positively) correlated with remittance inflows. These results are robust across different model specifications.     

The log-moment formula for implied volatility

We revisit the foundational Moment Formula proved by Roger Lee fifteen years ago. We show that in the absence of arbitrage, if the underlying stock price at time T admits finite log-moments $\mathbb{E}[|\log S_T{|}^q]$ for some positive q, the arbitrage-free growth in the left wing of the implied volatility smile for T is less constrained than Lee's bound. The result is rationalized by a market trading discretely monitored variance swaps wherein the payoff is a function of squared log-returns, and requires no assumption for the underlying price to admit any negative moment. In this respect, the result can be derived from a model-independent setup. As a byproduct, we relax the moment assumptions on the stock price to provide a new proof of the notorious Gatheral–Fukasawa formula expressing variance swaps in terms of the implied volatility.     

Merton's portfolio optimization problem in a Black and Scholes market with non-Gaussian stochastic volatility of Ornstein-Uhlenbeck type

We study Merton's classical portfolio optimization problem for an investor who can trade in a risk-free bond and a stock. The goal of the investor is to allocate money so that her expected utility from terminal wealth is maximized. The special feature of the problem studied in this paper is the inclusion of stochastic volatility in the dynamics of the risky asset. The model we use is driven by a superposition of non-Gaussian Ornstein-Uhlenbeck processes and it was recently proposed and intensively investigated for real market data by Barndorff-Nielsen and Shephard (2001) . Using the dynamic programming method, explicit trading strategies and expressions for the value function via Feynman-Kac formulas are derived and verified for power utilities. Some numerical examples are also presented.     

Volatility of volatility is (also) rough

Using high-frequency data for major volatility indexes, we compute the volatility of volatility and show that its logarithm follows a fractional Brownian motion with Hurst parameter smaller than 1/2 thereby extending to the volatility asset class the recent findings obtained for the equity index markets. The results confirm that the volatility of volatility is a rough process and it possesses the long memory property. We also show that the correlation between the volatility and the volatility of volatility is positive, consistent with observations in the volatility option market. Lastly, a robustness check using volatility futures confirms the findings.     

The implied volatility smirk of commodity options

This paper studies the implied volatility (IV) smirks in four commodity markets by adopting Zhang and Xiang's methodology. First, we document the term structure and dynamics of IV smirks. Overall, the commodity IV curves are negatively skewed with a positive curvature. Then we analyze the commodity and S&P 500 returns' predictability based on in‐sample and out‐of‐sample tests and find that the information embedded in IV smirks can significantly predict monthly commodity and S&P 500 returns. For example, the risk‐neutral fourth cumulant (FC) from the crude oil market outperforms all of the standard predictors in predicting the S&P 500 returns.     

The limits of leverage

When trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment opportunities and proportional costs, we find strategies that maximize long‐term returns given average volatility. As leverage increases, rising rebalancing costs imply declining Sharpe ratios. Beyond a critical level, even returns decline. Holding the Sharpe ratio constant, higher asset volatility leads to superior returns through lower costs.     

The impact of crisis events on the stock returns volatility of international airlines

This paper adopts the generalized autoregressive conditional heteroskedasticity model to examine the relationship between the weekly returns of shares of the international airlines in 1996–2010. It also incorporates major international crisis events and observes the influence of different aspects on the volatility of returns of company shares. Different events exhibit significantly different regional volatility impulses in the countries in which the airlines are located. The Asian financial crisis enhances the returns volatility effects of Asian airline companies. The global financial crisis significantly intervenes with the returns volatility of airline companies around the world. The results suggest that major international events may all have risk effects on the returns on the share prices of airlines.     

股票市场波动性研究述评

创业板市场的波动性研究,对于完善我国证券市场机制、危机风险管理有着重要的意义。本文从研究对象、杠杆效应、长记忆性、模型拟合的角度描述股票市场的一些国内研究成果,即GARCH模型的发展和应用。     

Properties and the predictive power of implied volatility in the New Zealand dairy market

This study develops a dairy implied volatility index (DVIX), derived from New Zealand Exchange traded options on whole milk powder (WMP) futures. We document an inverse return–volatility relation which is asymmetric, where increases in WMP futures prices are associated with larger absolute changes in the DVIX than decreases. In sample, the results strongly suggest that the DVIX has a high information content regarding conditional variance and that the inclusion of historical information further improves the predictive power. Out of sample, we find that the DVIX provides substantial information about future realized volatility. We also document that a combination of historical volatility and the DVIX provides the best out-of-sample forecasts.     

Oil price volatility and real options: 35 years of evidence

There has been a surge in interest in the effects of uncertainty on investment decisions, motivated at least in part by the theory of real options. For example, Bloom (2009, Econometrica, 77, 623–685) shows that higher uncertainty causes firms to temporarily pause investment and hiring, generating sharp economic downturns. This paper investigates these effects by examining the response of disaggregated measures of production to volatility in oil prices. We find that increased oil price volatility has strong negative effects on the production of durable goods, such as transportation equipment, and oil exploration, such as the drilling of oil and gas wells.     

The impacts of public news announcements on intraday implied volatility dynamics

We examine the responses of intraday option-implied volatilities to scheduled announcements of macroeconomic indicators. The increase in implied volatility around macroeconomic news announcements is more pronounced for puts than for calls and is stronger for announcements made during trading hours than for those made during nontrading hours. These effects are also more pronounced in the crisis and postcrisis periods than in the precrisis period. Monetary policy announcements have a more substantial impact on volatility than other announcements have, even after controlling for news surprise components. The impact appears to be greater for policy rate hikes than for policy rate cuts.     

Assessing the asymmetric volatility linkages of energy and agricultural commodity futures during low and high volatility regimes

This study investigated the volatility linkages between energy and agricultural futures, including possible causes for these comovements, such as external macroeconomic and financial shocks during low and high volatility regimes. A combination of Markov-switching regressions and quadrivariate VAR–DCC–GARCH and VAR–BEKK–GARCH modeling revealed that external shocks have an asymmetric effect on the relationship of these assets with higher cross-correlations reported during high volatility regimes. This comovement effect outweighs the substitution effect between energy and agricultural products. Furthermore, the quadrivariate VAR–BEKK–GARCH model provides strong evidence of a bidirectional price volatility spillover between the agricultural and energy markets during periods of high volatility. Overall, the results suggest that energy futures can be effectively used for hedging in a portfolio comprising agricultural futures (and vice versa), while a combination of macroeconomic and financial index futures can serve as an effective hedging tool in investment portfolios comprising both energy and agricultural commodities.     

The short‐time behavior of VIX‐implied volatilities in a multifactor stochastic volatility framework

We consider a modeling setup where the volatility index (VIX) dynamics are explicitly computable as a smooth transformation of a purely diffusive, multidimensional Markov process. The framework is general enough to embed many popular stochastic volatility models. We develop closed‐form expansions and sharp error bounds for VIX futures, options, and implied volatilities. In particular, we derive exact asymptotic results for VIX‐implied volatilities, and their sensitivities, in the joint limit of short time‐to‐maturity and small log‐moneyness. The expansions obtained are explicit based on elementary functions and they neatly uncover how the VIX skew depends on the specific choice of the volatility and the vol‐of‐vol processes. Our results are based on perturbation techniques applied to the infinitesimal generator of the underlying process. This methodology has previously been adopted to derive approximations of equity (SPX) options. However, the generalizations needed to cover the case of VIX options are by no means straightforward as the dynamics of the underlying VIX futures are not explicitly known. To illustrate the accuracy of our technique, we provide numerical implementations for a selection of model specifications.     

Applicability of the resource-based and dynamic-capability views under environmental volatility

This study uses a group of informants and applies a step-by-step empirical process to examine the applicability of the resource-based view (RBV) and dynamic-capability view (DCV) to environmental volatility. Through examining 253 Taiwanese firms, this study finds that the explanatory power of DCV exceeds that of RBV in volatile environments. Firms that possess dynamic capabilities can effectively enhance their competitive advantages, despite facing highly volatile environments. Nevertheless, the RBV is effective in some ways and firms with valuable, rare, inimitable, and nonsubstitutable resources still possess competitive advantages. This article closes with theoretical and practical implications.     

Multivariate realized volatility forecasts of agricultural commodity futures

We forecast the multivariate realized volatility of agricultural commodity futures by constructing multivariate heterogeneous autoregressive (MHAR) models with flexible heteroscedastic error structures that allow for non-Gaussian distribution, stochastic volatility, and heteroscedastic and serial dependence. We evaluate the forecast performances of various models based on both statistical and economic criteria. The in-sample and out-of-sample results suggest that the proposed MHAR models allowing for flexible heteroscedastic covariance structures outperform the benchmark MHAR models. In addition, the proposed Bayesian MHAR models allowing for t innovations improve both in-sample and out-of-sample forecast performance of the corresponding MHAR models with Gaussian innovations.     

Existence of a calibrated regime switching local volatility model

By Gyöngy's theorem, a local and stochastic volatility model is calibrated to the market prices of all European call options with positive maturities and strikes if its local volatility (LV) function is equal to the ratio of the Dupire LV function over the root conditional mean square of the stochastic volatility factor given the spot value. This leads to a stochastic differential equation (SDE) nonlinear in the sense of McKean. Particle methods based on a kernel approximation of the conditional expectation, as presented in Guyon and Henry‐Labordère [Risk Magazine, 25, 92–97], provide an efficient calibration procedure even if some calibration errors may appear when the range of the stochastic volatility factor is very large. But so far, no global existence result is available for the SDE nonlinear in the sense of McKean. When the stochastic volatility factor is a jump process taking finitely many values and with jump intensities depending on the spot level, we prove existence of a solution to the associated Fokker–Planck equation under the condition that the range of the squared stochastic volatility factor is not too large. We then deduce existence to the calibrated model by extending the results in Figalli [Journal of Functional Analysis, 254(1), 109–153].