Prediction, volatility and complexity of financial markets:a move-based approach

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Sticky credit spreads, macroeconomic activity and equity market volatility

We uncover high persistence in credit spread series that can obscure the relationship between the theoretical determinants of credit risk and observed credit spreads. We use a Markovswitching model, which also captures the stability (low frequency changes) of credit ratings, to show why credit spreads may continue to respond to past levels of credit risk, even though the state of the economy has changed. A bivariate model of credit spreads and either macroeconomic activity or equity market volatility detects large and significant correlations that are consistent with theory but have not been observed in previous studies. © 2010 Nova Science Publishers, Inc. All rights reserved.

Pricing-to-market and the volatility of UK export prices

This empirical study examines the Pricing-To-Market (PTM) behaviour of 20 UK export sectors. Using both Exponential General Autoregressive Conditional Heteroscedasticity (EGARCH) and Threshold GARCH (TGARCH) estimation methods, we find evidence of PTM that is accompanied by strong conditional volatility and weak asymmetry effects. The PTM estimates suggest that when the currency of exporters appreciates in the current period, exporters pass-on between 31% and 94% of the Foreign Exchange (FX) rate increase to importers. However, both export price changes and producers' prices are sluggish, perhaps being driven by coordination failure and menu driven costs, amongst others. Furthermore, export prices contain strong time varying effects which impact on PTM strategy. Exporters do not typically appear to put much more weight on negative news of (say) an FX rate appreciation compared to positive news of an FX rate depreciation. Much depends on the export sector. © 2010 Taylor & Francis.

The forecast performance of competing implied volatility measures:the case of individual stocks

This study examines the information content of alternative implied volatility measures for the 30 components of the Dow Jones Industrial Average Index from 1996 until 2007. Along with the popular Black-Scholes and \model-free" implied volatility expectations, the recently proposed corridor implied volatil- ity (CIV) measures are explored. For all pair-wise comparisons, it is found that a CIV measure that is closely related to the model-free implied volatility, nearly always delivers the most accurate forecasts for the majority of the firms. This finding remains consistent for different forecast horizons, volatility definitions, loss functions and forecast evaluation settings.

The effects of quantitative easing on the volatility of the gilt-edged market

We model the effects of quantitative easing on the volatility of returns to individual gilts, examining both the effects of QE overall and of the specific days of asset purchases. The action of QE successfully neutralized the six fold increase in volatility that had been experienced by gilts since the start of the financial crisis. The volatility of longer term bonds reduced more quickly than the volatility of short to medium term bonds. The reversion of the volatility of shorter term bonds to pre-crisis levels was found to be more sensitive to the specific operational actions of QE, particularly where they experienced relatively greater purchase activity.