Intraday Return Volatility Process: Evidence from NASDAQ Stocks

This paper presents a comprehensive analysis of the distributional and time-series properties of intraday returns. The purpose is to determine whether a GARCH model that allows for time varying variance in a process can adequately represent intraday return volatility. Our primary data set consists of 5-minute returns, trading volumes, and bid-ask spreads during the period January 1, 1999 through March 31, 1999, for a subset of thirty stocks from the NASDAQ 100 Index. Our results indicate that the GARCH(1,1) model best describes the volatility of intraday returns. Current volatility can be explained by past volatility that tends to persist over time. These results are consistent with those of Akgiray (1989) who estimates volatility using the various ARCH and GARCH specifications and finds the GARCH(1,1) model performs the best. We add volume as an additional explanatory variable in the GARCH model to examine if volume can capture the GARCH effects. Consistent with results of Najand and Yung (1991) and Foster (1995) and contrary to those of Lamoureux and Lastrapes (1990), our results show that the persistence in volatility remains in intraday return series even after volume is included in the model as an explanatory variable. We then substitute bid-ask spread for volume in the conditional volatility equation to examine if the latter can capture the GARCH effects. The results show that the GARCH effects remain strongly significant for many of the securities after the introduction of bid-ask spread. Consistent with results of Antoniou, Homes and Priestley (1998), intraday returns also exhibit significant asymmetric responses of volatility to flow of information into the market.     

A non‐lattice pricing model of American options under stochastic volatility

In this article, an analytical approach to American option pricing under stochastic volatility is provided. Under stochastic volatility, the American option value can be computed as the sum of a corresponding European option price and an early exercise premium. By considering the analytical property of the optimal exercise boundary, the formula allows for recursive computation of the American option value. Simulation results show that a nonlattice method performs better than the lattice‐based interpolation methods. The stochastic volatility model is also empirically tested using S&P 500 futures options intraday transactions data. Incorporating stochastic volatility is shown to improve pricing, hedging, and profitability in actual trading. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:417–448, 2006     

An approximation pricing algorithm in an incomplete market: A differential geometric approach

The minimal distance equivalent martingale measure (EMM) defined in Goll and Rüschendorf (2001) is the arbitrage-free equilibrium pricing measure. This paper provides an algorithm to approximate its density and the fair price of any contingent claim in an incomplete market. We first approximate the infinite dimensional space of all EMMs by a finite dimensional manifold of EMMs. A Riemannian geometric structure is shown on the manifold. An optimization algorithm on the Riemannian manifold becomes the approximation pricing algorithm. The financial interpretation of the geometry is also given in terms of pricing model risk.Received: February 2004, Mathematics Subject Classification (2000): 62P05, 91B24, 91B28JEL Classification: G11, G12, G13Yuan Gao: Present address Block 617, Bukit Panjang Ring Road, 16-806,Singapore 670617. I am currently working in a major investment bank.This paper is based on parts of my doctoral dissertation Gao (2002),which isavailable upon request.Part of the research was done during my visit to HumboldtUniversity in 2002 and was partially supported by Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 373. I am especially thankful to Professor Hans Föllmer for the invitation and helpful discussions.We would like to thank Professor Martin Schweizer,the associate editor and the referee for their constructive comments.     

The Surge of Asian NIC Investment into Indonesia 1

Since 1987 a dramatic increase in both domestic and foreign investment in Indonesia, most of it in export-oriented activities, has occurred in response to improvements in a previously unattractive investment climate and in the country's trade regime. Most striking has been the rise in investment by Asia's four ‘newly-industrialising countries’ (NICs): Korea, Taiwan, Hong Kong and Singapore. This paper analyses the factors contributing to this increase and the investment patterns of the four countries. It then focuses on investment in the manufacturing sector, where most of the NIC investments have taken place. The relative importance of each country as a source of investment in individual sectors and industries is examined. The paper concludes that this recent investment surge may yield net social benefits for Indonesia, provided the country continues to adhere to sound macroeconomic and export-promoting policies.     

Book Reviews

Sumitro Djojohadikusumo, Perkembangan Pemikiran Ekonomi, Buku I: Dasar Teori Dalam Ekonomi Umum [The Development of Economic Thought, Book I: The Theoretical Basis In General Economics], Jakarta: Yayasan Obor Indonesia, 1991, pp. xxviii + 429

Selo Soemardjan, Indonesia: A Socio-Economic Profile, New Delhi: Sterling Publishers, 1988, pp. xi + 162

Australian International Development Assistance Bureau, Australia's Development Cooperation with Indonesia in the Agricultural sector, Volume 1: Main Report, Canberra: AIDAB, April 1991

Colin Barlow, Ria Gondowarsito, A. T. Birowo and S. K. W. Jayasuriya, Development in Eastern Indonesia: The Case of Nusa Tenggara Timur, Canberra: Australian Government Publishing Service, 1990, pp. v + 110

Jan G. I. Palte, Upland Farming on Java, Indonesia, Nederlandse GeografischeStudies 97, Amsterdam/Utrecht: Royal Dutch Geographical Society and Geographical Institute, University of Utrecht, 1989, pp. 256

Thomas Schweizer, Reisanbau in einem javanischen Dorf [Rice Cultivation in a Javanese Village, Köln: Böhlau Verlag, 1989, pp. xvi + 718

Desmond Ball and Helen Wilson (eds), Strange Neighbours: The Australia-Indonesia Relationship, Sydney and Singapore: Allen and Unwin, 1991, pp. xiv + 268. $24.95

The World Bank, Indonesia: Family Planning Perspectives in the 1990s, Washington D. C.: The world Bank, 1990, pp. xxii + 143

Jan Breman, Labour Migration and Rural Transformation in Colonial Asia, Amsterdam: Free University Press for Centre for Asian Studies, 1990, pp. 82, Dfl. 19.50; £9.50

Kenji Tsuchiya, Democracy and Leadership: The Rise of the Taman Siswa Movement in Indonesia, Monographs of the Centre for Southeast Asian studies, Kyoto University, English Language Series, No. 18, Honolulu: University of Hawaii Press, 1987, pp. xv + 230. US$16.00

BRIEFLY NOTED: Simme Veldman, Route Planning in a Centrally Assisted Liner System, Delft: Eburon, 1990, pp. 230

Richard Robinson, Power and Economy in Suharto's Indonesia, Journal of Contemporary Asia Publishers, Manila and Wollongong, 1990, pp. iv + 207     

Book Reviews

Huib Foot, Arie Kuyvenhoven and Jaap Jansen, Industrialisation and Trade in Indonesia, Yogyakarta: Gadjah Mada University Press, 1990, pp. vii + 552.

W.L. Korthals Altes, General Trade Statistics, 1822–1940, Changing Economy in Indonesia, Volume 12a, Amsterdam: Royal Tropical Institute, 1991, pp. 200.

Adrian Clemens, J. Thomas Lindblad and Jeroen Touwen, Regional Patterns in Foreign Trade, 1911–1940, Changing Economy in Indonesia, Volume 12B, Amsterdam: Royal Tropical Institute, 1992, pp. 104.

BRIEFLY NOTED: Australian International Development Assistance Bureau, Introduction to Government Administration, Planning and Budgeting in Indonesia, Canberra: Aidab, 1991, pp. xxii + 60.

Helen Hughes (ed.), The Dangers of Export Pessimism: Developing Countries and Industrial Markets, San Francisco: International Center for Economic Growth, 1992, pp. xxvii + 446.

M.G. Asher el al., Fiscal Incentives and Economic Management in Indonesia, Malaysia and Singapore, Singapore: Asian-Pacific Tax and Investment Research Centre, 1992, pp. viii + 133.

Hal Hill, Indonesia's Textile and Garment Industries: Developments in an Asian Perspective, Occasional paper no. 87, Singapore: Institute of Southeast Asian Studies, 1992, pp. vi + 83.