How important is the term structure in implied volatility surface modeling? Evidence from foreign exchange options

We claim that previously proposed parametric specifications that linearly approximate the term structure of the implied volatility surface (IVS) in option prices fail to capture important information regarding the expectations of market participants. This paper proposes a parametric specification for describing the IVS that allows flexible modeling of the term structure through a Nelson and Siegel (1987) factorization, recently proposed by Diebold and Li (2006) in the context of yield curve modeling. The specification is tested on implied volatilities from the over-the-counter foreign exchange options market, where contracts with long expiries are actively traded and thus the term structure dimension of the surface should be very important. We first show that the proposed volatility specification can consistently and remarkably improve our ability to describe the surface on any given day. We then establish the economic relevance of the incremental information captured by our proposed specification by showing that it can produce more accurate forecasts of implied volatility that can support long-term profitable trading strategies in the absence of transaction costs.     

Are Full Employment and Social Cohesion Possible Under Financialization?

Unemployment and unequal income distribution were singled out by J.M. Keynes, in the General Theory, as major faults of capitalist economies. This paper argues that there is a negative relationship between financialization and unemployment. In particular, we develop a simple Post Keyneian/Kaleckian model and explore distribution as well as institutional channels through which financialization might have negatively affected the employment performance of capitalist economies, undermining the social cohesion and egalitarian development. Furthermore, we argue that in the face of financialization full employment is likely to be attainable under the institutionalization of an Employer of Last Resort (hereafter ELR) policy strategy.     

Net entry behaviour in Greek manufacturing: consumer, intermediate and capital goods industries

This research explores the nature and causes of net entry of firms in three groups of Greek manufacturing industries–consumer, intermediate and capital goods. The research questions whether or not the determinants of net entry rates across sectors are different. Econometric analyses reveal that, indeed, there are significant differences in the determinants of net entry rates across industry groups, but also there is strong within-group correlation across sectors.     

Exchange Rates and Stock Prices in the MENA Countries: What Role for Oil?

This paper considers the linkage between stock prices and exchange rates in four MENA (Middle East and North Africa) emerging markets. In contrast to the existing evidence that uses a global market index to uncover such a relationship it is found that for the sample countries oil prices emerge as the dominant factor in the above relationship. The paper considers the presence of regime shifts and evidence is found of cointegration only for the period following the 1999 oil price shock. Readjustment towards equilibrium in each stock market occurs via oil price changes. Finally, a number of robustness checks are performed and persistence profiles produced.     

Structural change in the forward discount: Implications for the forward rate unbiasedness hypothesis

It is a well-accepted empirical result that forward exchange rate unbiasedness is rejected in tests using the “differences regression” of the change in the logarithm of the spot exchange rate on the forward discount. We model the forward discount as an AR(1) process and argue that its persistence is exaggerated due to the presence of structural breaks. We show using a stochastic multiple break model that the forward discount persistence is substantially less if one allows for multiple structural breaks in the mean of the process. We argue that these breaks could be identified as monetary shocks to the central bank's reaction function. Using Monte Carlo simulations, we show that if we do not account for structural breaks that are present in the forward discount process, the forward discount coefficient in the “differences regression” is severely biased downward, away from its true value of 1.     

Predictable dynamics in implied volatility surfaces from OTC currency options

Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.     

Intra-Industry Growth Dynamics in the Greek Services Sector: Firm-Level Estimates for ICT-Producing,ICT-Using,and Non-ICT Industries

The stochastic patterns of firm growth are examined with the use of a data set of 4,975 firms surviving in the Greek services sector over the 1995–2001 period. The analysis first takes into account the intensity of information and communication technologies (ICT) in the services industries and then, through a system dynamic panel data technique, investigates how initial size and past growth influence firm growth. The classification of industries as three ICT-related groups provides interesting results at both the aggregated group level and the disaggregated industrial level. In general, Gibrat’s Law is accepted for firms in ICT intensive industries, while it is rejected in non-ICT industries.     

A residual inaccuracy measure based on the relevation transform

Inaccuracy and information measures based on the cumulative residual entropy are useful in various fields, and are attracting increasing attention in Probability Theory and Statistics. In this paper, we introduce and study an inaccuracy measure concerning the relevation transform of two nonnegative continuous random variables. We investigate various distributional properties and characterization results that are based on the mean residual lifetime and involve the generalized Pareto distribution. A connection with the proportional hazards model is also provided. We obtain comparison results involving the proposed inaccuracy measure and some existing inaccuracy measures. Some illustrative examples are finally given.     

Regulating the Platform Economy: How to Protect Workers While Promoting Innovation

The rise of the platform economy has made it a topic of great interest among European policymakers, as evidenced by the European Commission’s 2016 Communication “A European agenda for the collaborative economy”. The regulatory challenges facing policymakers are manifold, ranging from taxation to competition policy to worker protection. Furthermore, many basic aspects of the platform economy are unclear, such as its size, the number of workers who take part in it and, indeed, its very definition. What types of regulation are necessary to ensure that the benefits of the platform economy are maximised for all Europeans? How can the productivity gains associated with the platform economy be distributed throughout society? Perhaps most importantly, how can policymakers support innovation while also protecting consumers, workers and communities?     

Collaborative Economy: Market Design and Basic Regulatory Principles

The rise of the collaborative economy platforms reveals that policymakers need to start thinking about how to introduce flexibility in the provision of services in these formal relationships with adequate protection for all of the involved parties.