Modeling and Forecasting Implied Volatility: Implications for Trading, Pricing, and Risk Management

Modeling and forecasting of implied volatility (IV) is important to both practitioners and academics, especially in trading, pricing, hedging, and risk management activities, all of which require an accurate volatility. However, it has become challenging since the 1987 stock market crash, as implied volatilities (IVs) recovered from stock index options present two patterns: volatility smirk(skew) and volatility term-structure, if the two are examined at the same time, presents a rich implied volatility surface (IVS). This implies that the assumptions behind the Black-Scholes (1973) model do not hold empirically, as asset prices are mostly influenced by many underlying risk factors. This thesis, consists of four essays, is modeling and forecasting implied volatility in the presence of options markets’ empirical regularities. The first essay is modeling the dynamics IVS, it extends the Dumas, Fleming and Whaley (DFW) (1998) framework; for instance, using moneyness in the implied forward price and OTM put-call options on the FTSE100 index, a nonlinear optimization is used to estimate different models and thereby produce rich, smooth IVSs. Here, the constant-volatility model fails to explain the variations in the rich IVS. Next, it is found that three factors can explain about 69-88% of the variance in the IVS. Of this, on average, 56% is explained by the level factor, 15% by the term-structure factor, and the additional 7% by the jump-fear factor. The second essay proposes a quantile regression model for modeling contemporaneous asymmetric return-volatility relationship, which is the generalization of Hibbert et al. (2008) model. The results show strong negative asymmetric return-volatility relationship at various quantiles of IV distributions, it is monotonically increasing when moving from the median quantile to the uppermost quantile (i.e., 95%); therefore, OLS underestimates this relationship at upper quantiles. Additionally, the asymmetric relationship is more pronounced with the smirk (skew) adjusted volatility index measure in comparison to the old volatility index measure. Nonetheless, the volatility indices are ranked in terms of asymmetric volatility as follows: VIX, VSTOXX, VDAX, and VXN. The third essay examines the information content of the new-VDAX volatility index to forecast daily Value-at-Risk (VaR) estimates and compares its VaR forecasts with the forecasts of the Filtered Historical Simulation and RiskMetrics. All daily VaR models are then backtested from 1992-2009 using unconditional, independence, conditional coverage, and quadratic-score tests. It is found that the VDAX subsumes almost all information required for the volatility of daily VaR forecasts for a portfolio of the DAX30 index; implied-VaR models outperform all other VaR models. The fourth essay models the risk factors driving the swaption IVs. It is found that three factors can explain 94-97% of the variation in each of the EUR, USD, and GBP swaption IVs. There are significant linkages across factors, and bi-directional causality is at work between the factors implied by EUR and USD swaption IVs. Furthermore, the factors implied by EUR and USD IVs respond to each others’ shocks; however, surprisingly, GBP does not affect them. Second, the string market model calibration results show it can efficiently reproduce (or forecast) the volatility surface for each of the swaptions markets.

Essays on Risk Modeling. Applications to Portfolio and Risk Management (summary section only)

In this thesis we deal with the concept of risk. The objective is to bring together and conclude on some normative information regarding quantitative portfolio management and risk assessment. The first essay concentrates on return dependency. We propose an algorithm for classifying markets into rising and falling. Given the algorithm, we derive a statistic: the Trend Switch Probability, for detection of long-term return dependency in the first moment. The empirical results suggest that the Trend Switch Probability is robust over various volatility specifications. The serial dependency in bear and bull markets behaves however differently. It is strongly positive in rising market whereas in bear markets it is closer to a random walk. Realized volatility, a technique for estimating volatility from high frequency data, is investigated in essays two and three. In the second essay we find, when measuring realized variance on a set of German stocks, that the second moment dependency structure is highly unstable and changes randomly. Results also suggest that volatility is non-stationary from time to time. In the third essay we examine the impact from market microstructure on the error between estimated realized volatility and the volatility of the underlying process. With simulation-based techniques we show that autocorrelation in returns leads to biased variance estimates and that lower sampling frequency and non-constant volatility increases the error variation between the estimated variance and the variance of the underlying process. From these essays we can conclude that volatility is not easily estimated, even from high frequency data. It is neither very well behaved in terms of stability nor dependency over time. Based on these observations, we would recommend the use of simple, transparent methods that are likely to be more robust over differing volatility regimes than models with a complex parameter universe. In analyzing long-term return dependency in the first moment we find that the Trend Switch Probability is a robust estimator. This is an interesting area for further research, with important implications for active asset allocation.

Preventive orientation and caries management by Iranian dentists

Ehkäisypainotteisuus karieksen hoidossa: iranilaishammaslääkärien hoitovalinnat Karies aiheuttaa hampaiden kovan pinnan ja hammasluun syöpymistä, joka lopulta näkyy ”reikänä”. Iästä riippumatta kariesvaara vaanii kaikkia hampaiden omistajia, vauvasta vaariin, ja lähes kaikilla aikuisilla on suussaan merkkejä karieksesta. Karies etenee yleensä hitaasti ja antaa siten aikaa ehkäisevälle hoidolle. Tämä etsikkoaika jää usein käyttämättä, ja karieksen hoito painottuu reikien paikkaamiseen. Karies voitaisiin pitää kurissa sen ehkäisyyn kehitetyillä monipuolisilla keinoilla. Hammaslääkärit ovat avainasemassa, sillä he tekevät kauaskantoisia valintoja — hoidetaanko kariesta paikkaamalla vai valitaanko ehkäisevä hoito? Valintojen taustalla ovat hammaslääkärin tietotaso, asenteet ja omat terveystavat sekä potilaiden ja vastaanoton aiheuttamiksi koetut esteet. Tämä kyselytutkimus selvitti karieksen hoitovalintoja ja niiden taustoja Iranissa. Kysymyslomakkeet jaettiin kahdessa hammaslääkärien kongressissa Teheranissa (2004─2005) ja palautettiin nimettöminä. Kysely kartoitti hammaslääkärien tietoja karieksen ehkäisykeinoista ja asenteita ehkäisyä kohtaan sekä koettuja esteitä sen toteuttamisessa. Hoitovalintoja selvitettiin tarkasti kuvattujen esimerkkipotilaiden avulla. Kysely kartoitti myös hammaslääkärien omat terveystavat: suun omahoidon, tupakoinnin ja hammaslääkärissä käynnin. Aineisto käsitti 980 iältään keskimäärin 37-vuotiasta hammaslääkäriä, joista 64 % oli miehiä. Iranilaishammaslääkärien tiedot karieksen ehkäisystä olivat fluorihammastahnan merkitystä lukuun ottamatta hyvät ja heidän asenteensa ehkäisyä kohtaan valtaosin myönteiset. Tästä huolimatta 77 % heistä olisi valinnut suuren kariesvaaran potilaalle hammaskiilteessä olevan reiän hoidoksi paikkauksen. Ehkäisyhoidoksi tarjotuista 8:sta keinosta lähes kaikki hammaslääkärit valitsivat suuren kariesvaaran potilaalle hoidoksi harjausopetuksen ja säännölliset hammastarkastukset, noin 80 % valitsi hampaiden puhdistamisen vastaanotolla ja ravintoneuvonnan, 70 % ohjeet fluorihuuhteluista kotona ja 53 % vastaanotolla tehtävän fluorikäsittelyn. Potilaiden vastustavat mielipiteet arvioitiin suurimmaksi esteeksi ehkäisevän hoidon toteuttamiselle. Hammaslääkäreistä 59 % ilmoitti harjaavansa hampaansa kahdesti päivässä; 76 % ei tupakoinut ja 56 % kertoi aina ehdottavansa tupakoivalle potilaalle tupakoinnin lopettamista. Hammaslääkärien ehkäisypainotteisuus karieshoidossa oli naisilla vahvempi kuin miehillä. Tulosten perusteella voi päätellä, että Iranissa tulisi nykyistä selvemmin suosia ehkäisevää linjaa karieksen hoitovalintoja tehtäessä ja hammaslääkäreitä koulutettaessa. Potilastyössä koettujen ehkäisyhoidon esteiden syvällisempi ymmärtäminen edesauttaisi niiden poistamisessa.

Childhood otitis media - risk factors and surgical management

Background: Otitis media (OM) is one of the most common childhood diseases. Approximately every third child suffers from recurrent acute otitis media (RAOM), and 5% of all children have persistent middle ear effusion for months during their childhood. Despite numerous studies on the prevention and treatment of OM during the past decades, its management remains challenging and controversial. In this study, the effect of adenoidectomy on the risk for OM, the potential risk factors influencing the development of OM and the frequency of asthma among otitis-prone children were investigated. Subjects and methods: One prospective randomized trial and two retrospective studies were conducted. In the prospective trial, 217 children with RAOM or chronic otitis media with effusion (COME) were randomized to have tympanostomy with or without adenoidectomy. The age of the children at recruitment was between 1 and 4 years. RAOM was defined as having at least 3 episodes of AOM during the last 6 months or at least 5 episodes of AOM during the last 12 months. COME was defined as having persistent middle ear effusion for 2-3 months. The children were followed up for one year. In the first retrospective study, the frequency of childhood infections and allergy was evaluated by a questionnaire among 819 individuals. In the second retrospective study, data of asthma diagnosis were analysed from hospital discharge records of 1616 children who underwent adenoidectomy or had probing of the nasolacrimal duct. Results: In the prospective randomized study, adenoidectomy had no beneficial effect on the prevention of subsequent episodes of AOM. Parental smoking was found to be a significant risk factor for OM even after the insertion of tympanostomy tubes. The frequencies of exposure to tobacco smoke and day-care attendance at the time of randomization were similar among children with RAOM and COME. However, the frequencies of allergy to animal dust and pollen and parental asthma were lower among children with COME than those with RAOM. The questionnaire survey and the hospital discharge data revealed that children who had frequent episodes of OM had an increased risk for asthma. Conclusions: The first surgical intervention to treat an otitis-prone child younger than 4 years should not include adenoidectomy. Interventions to stop parental smoking could significantly reduce the risk for childhood RAOM. Whether an otitis-prone child develops COME or RAOM, seems to be influenced by genetic predisposition more strongly than by environmental risk factors. Children who suffer from repeated upper respiratory tract infections, like OM, may be at increased risk for developing asthma.

How do Researchers Find and Retrieve Scientific Publications – A Case study of the Impact of the Internet on the Construction IT and Construction Management Research Communities

The World Wide Web provides the opportunity for a radically changed and much more efficient communication process for scientific results. A survey in the closely related domains of construction information technology and construction management was conducted in February 2000, aimed at measuring to what extent these opportunities are already changing the scientific information exchange and how researchers feel about the changes. The paper presents the results based on 236 replies to an extensive Web based questionnaire. 65% of the respondents stated their primary research interest as IT in A/E/C and 20% as construction management and economics. The questions dealt with how researchers find, access and read different sources; how much and what publications they read; how often and to which conferences they travel; how much they publish, and what are the criteria for where they eventually decide to publish. Some of the questions confronted traditional and electronic publishing with one final section dedicated to opinions about electronic publishing. According to the survey researchers already download half of the material that they read digitally from the Web. The most popular method for retrieving an interesting publication is downloading it for free from the author’s or publisher’s website. Researchers are not particularly willing to pay for electronic scientific publications. There is much support for a scenario of electronic journals available totally freely on the Web, where the costs could be covered by for instance professional societies or the publishing university. The shift that the Web is causing seems to be towards the "just in time" reading of literature. Also, frequent users of the Web rely less on scientific publications and tend to read fewer articles. If available with little effort, papers published in traditional journals are preferred; if not, the papers should be on the Web. In these circumstances, the role of paper-based journals published by established publishers is shifting from the core "information exchange" to the building of authors' prestige. The respondents feel they should build up their reputations by publishing in journals and relevant conferences, but then make their work freely available on the Web.

Laundry Symbols and License Management

One of the most challenging tasks in building language resources is the copyright license management. There are several reasons for this. First of all, the current European copyright system is designed to a large extent to satisfy the commercial actors, e.g. publishers, record companies etc. This means that the scope and duration of the rights are very extensive and there are even certain forms of protection that do not exist elsewhere in the world, e.g. database right. On the other hand, the exceptions for research and teaching are typically very narrow.