Hedging options in a garch environment: testing the term structure of stochastic volatility models

This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S&P500 index volatility. U sing measurements of the ability of volatility models to hedge and value term structure dependent option positions, we fmd that hedging tests support the Black-Scholes delta and gamma hedges, but not the simple vega hedge when there is no model of the term structure of volatility. With various models, it is difficult to improve on a simple gamma hedge assuming constant volatility. Ofthe volatility models, the GARCH components estimate of term structure is preferred. Valuation tests indicate that all the models contain term structure information not incorporated in market prices.

Simulation-based smoothing and filtering in factor stochastic volatility models : two econometric applications

In this article we use factor models to describe a certain class of covariance structure for financiaI time series models. More specifical1y, we concentrate on situations where the factor variances are modeled by a multivariate stochastic volatility structure. We build on previous work by allowing the factor loadings, in the factor mo deI structure, to have a time-varying structure and to capture changes in asset weights over time motivated by applications with multi pIe time series of daily exchange rates. We explore and discuss potential extensions to the models exposed here in the prediction area. This discussion leads to open issues on real time implementation and natural model comparisons.

Simulation -based smoothing and filtering in factor stochastic volatility models : two econometric applications (July-2001)

The past decade has wítenessed a series of (well accepted and defined) financial crises periods in the world economy. Most of these events aI,"e country specific and eventually spreaded out across neighbor countries, with the concept of vicinity extrapolating the geographic maps and entering the contagion maps. Unfortunately, what contagion represents and how to measure it are still unanswered questions. In this article we measure the transmission of shocks by cross-market correlation\ coefficients following Forbes and Rigobon's (2000) notion of shift-contagion,. Our main contribution relies upon the use of traditional factor model techniques combined with stochastic volatility mo deIs to study the dependence among Latin American stock price indexes and the North American indexo More specifically, we concentrate on situations where the factor variances are modeled by a multivariate stochastic volatility structure. From a theoretical perspective, we improve currently available methodology by allowing the factor loadings, in the factor model structure, to have a time-varying structure and to capture changes in the series' weights over time. By doing this, we believe that changes and interventions experienced by those five countries are well accommodated by our models which learns and adapts reasonably fast to those economic and idiosyncratic shocks. We empirically show that the time varying covariance structure can be modeled by one or two common factors and that some sort of contagion is present in most of the series' covariances during periods of economical instability, or crisis. Open issues on real time implementation and natural model comparisons are thoroughly discussed.

Stabilization, volatility and the equilibrium real exchange rate

In a general equilibrium model. we show that the value of the equilibrium real exchange rate is affected by its own volatility. Risk averse exporters. that make their exporting decision before observing the realization of the real exchange rate. choose to export less the more volatile is the real exchange rate. Therefore the trude balance and the variance of the real exchange rate are negatively related. An increase in the volatility of the real exchange rate for instance deteriorates the trade balance and to restore equilibrium a real exchange rate depreciation has to take place. In the empirical part of the paper we use the traditional (unconditional) standard deviation of RER changes as our measure of RER volatility.We describe the behavior of the RER volatility for Brazil,Argentina and Mexico.Monthly data for the three countries are used. and also daily data for Bruzil. Interesting patterns of volatility could be associated to the nature of the several stabilization plans adopted in those countries and to changes in the exchange rate regimes .

Reality check for volatility models

Asset allocation decisions and value at risk calculations rely strongly on volatility estimates. Volatility measures such as rolling window, EWMA, GARCH and stochastic volatility are used in practice. GARCH and EWMA type models that incorporate the dynamic structure of volatility and are capable of forecasting future behavior of risk should perform better than constant, rolling window volatility models. For the same asset the model that is the ‘best’ according to some criterion can change from period to period. We use the reality check test∗ to verify if one model out-performs others over a class of re-sampled time-series data. The test is based on re-sampling the data using stationary bootstrapping. For each re-sample we check the ‘best’ model according to two criteria and analyze the distribution of the performance statistics. We compare constant volatility, EWMA and GARCH models using a quadratic utility function and a risk management measurement as comparison criteria. No model consistently out-performs the benchmark.

Implied Hazard Rates Analysis Through Brazilian Corporate Debt

No Brasil, o mercado de crédito corporativo ainda é sub-aproveitado. A maioria dos participantes não exploram e não operam no mercado secundário, especialmente no caso de debêntures. Apesar disso, há inúmeras ferramentas que poderiam ajudar os participantes do mercado a analisar o risco de crédito e encorajá-los a operar esses riscos no mercado secundário. Essa dissertação introduz um modelo livre de arbitragem que extrai a Perda Esperada Neutra ao Risco Implícita nos preços de mercado. É uma forma reduzida do modelo proposto por Duffie and Singleton (1999) e modela a estrutura a termo das taxas de juros através de uma Função Constante por Partes. Através do modelo, foi possível analisar a Curva de Perda Esperada Neutra ao Risco Implícita através dos diferentes instrumentos de emissores corporativos brasileiros, utilizando Títulos de Dívida, Swaps de Crédito e Debêntures. Foi possível comparar as diferentes curvas e decidir, em cada caso analisado, qual a melhor alternativa para se tomar o risco de crédito da empresa, via Títulos de Dívida, Debêntures ou Swaps de Crédito.

Elections and stock market volatility: evidence in OECD countries and developing countries

Este trabalho estuda se existe impacto na volatilidade dos mercados de ações em torno das eleições nacionais nos países da OCDE e nos países em Desenvolvimento. Ao mesmo tempo, pretende, através de variáveis explicativas, descobrir os fatores responsáveis por esse impacto. Foi descoberta evidência que o impacto das eleições na volatilidade dos mercados de ações é maior nos países em Desenvolvimento. Enquanto as eleições antecipadas, a mudança na orientação política e o tamanho da população foram os factores que explicaram o aumento da volatilidade nos países da OCDE, o nível democrático, número de partidos da coligação governamental e a idade dos mercados foram os factores explicativos para os países em Desenvolvimento.

Options listing and the volatility of the underlying asset: a study on the derivative market function

Os mercados de derivativos são vistos com muita desconfiança por inúmeras pessoas. O trabalho analisa o efeito da introdução de opções sobre ações no mercado brasileiro buscando identificar uma outra justificativa para a existência destes mercados: a alteração no nível de risco dos ativos objetos destas opções. A evidência empírica encontrada neste mercado está de acordo com os resultados obtidos em outros mercados - a introdução de opções é benéfica para o investidor posto que reduz a volatilidade do ativo objeto. Existe também uma tênue indicação de que a volatilidade se torna mais estocástica com a introdução das opções.

Volatility of returns, variations in prices and volume traded: evidence from the main stocks in Brazil

We study the relationship between the volatility and the price of stocks and the impact that variables such as past volatility, financial gearing, interest rates, stock return and turnover have on the present volatility of these securities. The results show the persistent behavior of volatility and the relationship between interest rate and volatility. The results also showed that a reduction in stock prices are associated with an increase in volatility. Finally we found a greater trading volume tends to increase the volatility.

Speculative bubbles and contagion: analysis of volatility's clusters during the DotCom bubble based on the dynamic conditional correlation model

Reviewing the de nition and measurement of speculative bubbles in context of contagion, this paper analyses the DotCom bubble in American and European equity markets using the dynamic conditional correlation (DCC) model proposed by (Engle and Sheppard 2001) as on one hand as an econometrics explanation and on the other hand the behavioral nance as an psychological explanation. Contagion is de ned in this context as the statistical break in the computed DCCs as measured by the shifts in their means and medians. Even it is astonishing, that the contagion is lower during price bubbles, the main nding indicates the presence of contagion in the di¤erent indices among those two continents and proves the presence of structural changes during nancial crisis

Robust Bayesian analysis of heavy-tailed stochastic volatility models using scale mixtures of normal distributions

Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP)

Economic Survey of Latin America and the Caribbean 2007-2008: Macroeconomic policy and volatility

Includes bibliography

The globalization of financial volatility: challenges for emerging economies

Includes bibliography

Corporate risk management and exchange rate volatility in Latin America

Includes bibliography