Tax reforms and stock return volatility: The case of Japan

Although global financial turmoil in recent years has resulted in renewed interest in taxing financial markets, the existing evidence is inconclusive regarding the effect of stock transaction taxes (STT) on stock return volatility. In this respect, Japan provides an excellent opportunity to address the issue, as the country enacted major tax reforms during the long recession beginning in the early 1990s, not only abolishing STT in 1999, but also reducing the capital gains and dividend taxes in 2003. The present paper exploits these tax reform episodes and examines whether and how they affected stock return volatility. In so doing, it employs GARCH-type models using standard daily stock data, as well as HAR models based on realized volatility constructed from high-frequency, intraday data. The estimation results are consistent with the views that, in line with some earlier findings, the STT abolition in 1999 reduced volatility, and that the tax reforms in 2003 also reduced volatility through a cut in the dividend tax, but not in the capital gains tax.     

中国金融业技术效率的区域差异研究

中国金融业技术效率存在较为显著的东、中、西部差异,并成为区域金融业发展水平差异性的影响因素。区域经济发展水平或市场发展水平以及区域教育发展水平的差异性是形成中国区域金融业技术效率差异性的基本原因,区域金融业技术效率水平将经历由特定区域引领到逐步趋于均衡的过程。加快区域金融业技术效率的提高应从区域经济发展或市场发展以及教育水平提高等方面进行。     

Volatility Spillover from the Fear Index to Developed and Emerging Markets

This article examines cross-market volatility linkages among the fear index (VIX), the developed-market index (VXEFA), and the emerging-market index (VXEEM). Analysis on the first moments of volatilities reveals that the fear index has a leading role and has information content for VXEFA and VXEEM. A shock to the fear index spillovers to VXEFA and VXEEM and contributes 57.07% and 63.77% to their shocks, respectively. Further analysis on the second moments of volatilities confirms that the volatility indices are highly dynamically correlated while the fear index drives the correlation dynamics with the VXEEM. Correlations increase in turbulent periods and decrease in tranquil periods.     

Analysing money demand relation for OECD countries using common factors

This article investigates the existence of a long-run money demand relation for a panel data consisting of 13 OECD countries. The analysis is based on the most recent data. The existence of a long-run money demand relation is tested with two new meta-analytic panel cointegrating rank tests which are robust to cross-sectional dependence. Cross-sectional dependency in the data generating process is modelled by unobserved common factors. The observed data are decomposed into idiosyncratic and common components, and these two components are analysed separately to find out the driving forces of the long-run stationary relationship. The evidence shows that the long-run money demand relation is driven by the cross-unit cointegration. Finally, the long-run relation is estimated by taking the common factors into account.     

Forecasting the oil futures price volatility: A new approach

This study provides a new perspective of modelling and forecasting realized range-based volatility (RRV) for crude oil futures. We are the first to improve the Heterogeneous Autoregressive model of Realized Range-based Volatility (HAR-RRV) model by considering the significant jump components, signed returns and volatility of realized range-based volatility. The empirical results show that the volatility of volatility significantly exists in the oil futures market. Moreover, our new proposed models with significant jump components, signed returns and volatility of volatility can gain higher forecast accuracy than HAR-RRV-type models. The results are robust to different forecasting windows and forecasting horizons. Our new findings are strategically important for investors making better decisions.     

IMPACT OF TIME ILLIQUIDITY IN A MIXED MARKET WITHOUT FULL OBSERVATION

We study a problem of optimal investment/consumption over an infinite horizon in a market with two possibly correlated assets: one liquid and one illiquid. The liquid asset is observed and can be traded continuously, while the illiquid one can be traded only at discrete random times, corresponding to the jumps of a Poisson process with intensity λ, is observed at the trading dates, and is partially observed between two different trading dates. The problem is a nonstandard mixed discrete/continuous optimal control problem, which we solve by a dynamic programming approach. When the utility has a general form, we prove that the value function is the unique viscosity solution of the associated Hamilton–Jacobi–Bellman equation and characterize the optimal allocation in the illiquid asset. In the case of power utility, we establish the regularity of the value function needed to prove the verification theorem, providing the complete theoretical solution of the problem. This enables us to perform numerical simulations, so as to analyze the impact of time illiquidity and how this impact is affected by the degree of observation.     

Implied correlation indices and volatility forecasting

Implied volatility indices are an important measure for ‘market fear’ and well-known in academia and practice. Correlation is still paid less attention even though the CBOE started to calculate implied correlation indices for the S&P500 in 2009. However, the literature especially on cross-country dependencies and applications is still quite thin. We are closing this gap by constructing an implied correlation index for the DAX and taking a deeper look at the (intercontinental) relationship between equity, volatility and correlation indices. Additionally, we show that implied correlation could improve implied volatility forecasting.     

EXPLICIT IMPLIED VOLATILITIES FOR MULTIFACTOR LOCAL‐STOCHASTIC VOLATILITY MODELS

We consider an asset whose risk‐neutral dynamics are described by a general class of local‐stochastic volatility models and derive a family of asymptotic expansions for European‐style option prices and implied volatilities. We also establish rigorous error estimates for these quantities. Our implied volatility expansions are explicit; they do not require any special functions nor do they require numerical integration. To illustrate the accuracy and versatility of our method, we implement it under four different model dynamics: constant elasticity of variance local volatility, Heston stochastic volatility, three‐halves stochastic volatility, and SABR local‐stochastic volatility.     

OPTIMAL HIGH‐FREQUENCY TRADING IN A PRO RATA MICROSTRUCTURE WITH PREDICTIVE INFORMATION

We propose a framework to study optimal trading policies in a one‐tick pro rata limit order book, as typically arises in short‐term interest rate futures contracts. The high‐frequency trader chooses to post either market orders or limit orders, which are represented, respectively, by impulse controls and regular controls. We discuss the consequences of the two main features of this microstructure: first, the limit orders are only partially executed, and therefore she has no control on the executed quantity. Second, the high‐frequency trader faces the overtrading risk, which is the risk of large variations in her inventory. The consequences of this risk are investigated in the context of optimal liquidation. The optimal trading problem is studied by stochastic control and dynamic programming methods, and we provide the associated numerical resolution procedure and prove its convergence. We propose dimension reduction techniques in several cases of practical interest. We also detail a high‐frequency trading strategy in the case where a (predictive) directional information on the price is available. Each of the resulting strategies is illustrated by numerical tests.     

THE 4/2 STOCHASTIC VOLATILITY MODEL: A UNIFIED APPROACH FOR THE HESTON AND THE 3/2 MODEL

We introduce a new stochastic volatility model that includes, as special instances, the Heston (1993) and the 3/2 model of Heston (1997) and Platen (1997). Our model exhibits important features: first, instantaneous volatility can be uniformly bounded away from zero, and second, our model is mathematically and computationally tractable, thereby enabling an efficient pricing procedure. This called for using the Lie symmetries theory for partial differential equations; doing so allowed us to extend known results on Bessel processes. Finally, we provide an exact simulation scheme for the model, which is useful for numerical applications.