Introduction of electronic trading in index futures : volatility and volume effects

There is continuing debate in the US over full introduction of electronic trading in those index futures contracts that are still traded at the CME via open outcry. Since the late 1990s major international exchanges trading index futures contracts have converted to full electronic trading. Recent empirical studies have focused on effects on bid/ask spreads and related price volatility following these changes. We take a different approach and investigate and test for structural change in conditional volatility and volume effects following the shift to electronic trading in the Australian Share Price Index futures contract. Multiple Switching point GARCH models are employed with the data sampled at 5, 15 and 30-minute intervals from transaction records supplied by the Sydney Futures Exchange. There is significant evidence of structural changes in both the persistence of volatility shocks and simultaneous volume effects following the change to screen trading in this futures market.

Caracterização dos retornos e das volatilidades de ativos financeiros do mercado Brasileiro : uma abordagem baseada na volatilidade realizada

The goal of this paper is twofold. First, using five of the most actively traded stocks in the Brazilian financial market, this paper shows that the normality assumption commonly used in the risk management area to describe the distributions of returns standardized by volatilities is not compatible with volatilities estimated by EWMA or GARCH models. In sharp contrast, when the information contained in high frequency data is used to construct the realized volatilies measures, we attain the normality of the standardized returns, giving promise of improvements in Value at Risk statistics. We also describe the distributions of volatilities of the Brazilian stocks, showing that the distributions of volatilities are nearly lognormal. Second, we estimate a simple linear model to the log of realized volatilities that differs from the ones in other studies. The main difference is that we do not find evidence of long memory. The estimated model is compared with commonly used alternatives in an out-of-sample experiment.

Eficiência e razão de hedge: uma análise dos mercados futuro brasileiros de boi, café, etanol, milho e soja

This research aims to investigate the Hedge Efficiency and Optimal Hedge Ratio for the future market of cattle, coffee, ethanol, corn and soybean. This paper uses the Optimal Hedge Ratio and Hedge Effectiveness through multivariate GARCH models with error correction, attempting to the possible phenomenon of Optimal Hedge Ratio differential during the crop and intercrop period. The Optimal Hedge Ratio must be bigger in the intercrop period due to the uncertainty related to a possible supply shock (LAZZARINI, 2010). Among the future contracts studied in this research, the coffee, ethanol and soybean contracts were not object of this phenomenon investigation, yet. Furthermore, the corn and ethanol contracts were not object of researches which deal with Dynamic Hedging Strategy. This paper distinguishes itself for including the GARCH model with error correction, which it was never considered when the possible Optimal Hedge Ratio differential during the crop and intercrop period were investigated. The commodities quotation were used as future price in the market future of BM&FBOVESPA and as spot market, the CEPEA index, in the period from May 2010 to June 2013 to cattle, coffee, ethanol and corn, and to August 2012 to soybean, with daily frequency. Similar results were achieved for all the commodities. There is a long term relationship among the spot market and future market, bicausality and the spot market and future market of cattle, coffee, ethanol and corn, and unicausality of the future price of soybean on spot price. The Optimal Hedge Ratio was estimated from three different strategies: linear regression by MQO, BEKK-GARCH diagonal model, and BEKK-GARCH diagonal with intercrop dummy. The MQO regression model, pointed out the Hedge inefficiency, taking into consideration that the Optimal Hedge presented was too low. The second model represents the strategy of dynamic hedge, which collected time variations in the Optimal Hedge. The last Hedge strategy did not detect Optimal Hedge Ratio differential between the crop and intercrop period, therefore, unlikely what they expected, the investor do not need increase his/her investment in the future market during the intercrop

Total Factor Productivity and Monetary Policy: Evidence from Conditional Volatility

This paper empirically assesses whether monetary policy affects real economic activity through its affect on the aggregate supply side of the macroeconomy. Analysts typically argue that monetary policy either does not affect the real economy, the classical dichotomy, or only affects the real economy in the short run through aggregate demand new Keynesian or new classical theories. Real business cycle theorists try to explain the business cycle with supply-side productivity shocks. We provide some preliminary evidence about how monetary policy affects the aggregate supply side of the macroeconomy through its affect on total factor productivity, an important measure of supply-side performance. The results show that monetary policy exerts a positive and statistically significant effect on the supply-side of the macroeconomy. Moreover, the findings buttress the importance of countercyclical monetary policy as well as support the adoption of an optimal money supply rule. Our results also prove consistent with the effective role of monetary policy in the Great Moderation as well as the more recent rise in productivity growth.

The Great Moderation Flattens Fat Tails: Disappearing Leptokurtosis

Recently, Fagiolo et al. (2008) find fat tails of economic growth rates after adjusting outliers, autocorrelation and heteroskedasticity. This paper employs US quarterly real output growth, showing that this finding of fat tails may reflect the Great Moderation. That is, leptokurtosis disappears after GARCH adjustment once we incorporate the break in the variance equation.

Dynamic Stock Market Interactions between the Canadian, Mexican, and the United States Markets: The NAFTA Experience

This paper explores the dynamic linkages that portray different facets of the joint probability distribution of stock market returns in NAFTA (i.e., Canada, Mexico, and the US). Our examination of interactions of the NAFTA stock markets considers three issues. First, we examine the long-run relationship between the three markets, using cointegration techniques. Second, we evaluate the dynamic relationships between the three markets, using impulse-response analysis. Finally, we explore the volatility transmission process between the three markets, using a variety of multivariate GARCH models. Our results also exhibit significant volatility transmission between the second moments of the NAFTA stock markets, albeit not homogenous. The magnitude and trend of the conditional correlations indicate that in the last few years, the Mexican stock market exhibited a tendency toward increased integration with the US market. Finally, we do note that evidence exists that the Peso and Asian financial crises as well as the stock-market crash in the US affect the return and volatility time-series relationships.

An exploratory analysis of variance and volatility in epileptic electroencephalograms

The electroencephalogram (EEG) is a physiological time series that measures electrical activity at different locations in the brain, and plays an important role in epilepsy research. Exploring the variance and/or volatility may yield insights for seizure prediction, seizure detection and seizure propagation/dynamics.^ Maximal Overlap Discrete Wavelet Transforms (MODWTs) and ARMA-GARCH models were used to determine variance and volatility characteristics of 66 channels for different states of an epileptic EEG – sleep, awake, sleep-to-awake and seizure. The wavelet variances, changes in wavelet variances and volatility half-lives for the four states were compared for possible differences between seizure and non-seizure channels.^ The half-lives of two of the three seizure channels were found to be shorter than all of the non-seizure channels, based on 95% CIs for the pre-seizure and awake signals. No discernible patterns were found the wavelet variances of the change points for the different signals. ^

Impacts of foreign exchange auctions on the informal market rate in Myanmar

Since the abolition of the official peg and the introduction of a managed float in April 2012, the Central Bank of Myanmar has operated the daily two–way auctions of foreign exchange aimed at smoothing exchange rate fluctuations. Despite the reforms to the foreign exchange regime, however, informal trading of foreign exchange remains pervasive. Using the daily informal exchange rate and Central Bank auction data, this study examines the impacts of auctions on the informal market rate. First, a VAR analysis indicates that the official rate did not Granger cause the informal rate. Second, GARCH models indicate that the auctions did not reduce the conditional variance of the informal rate returns. Overall, the auctions have only a quite modest impact on the informal exchange rate.

Modelling and forecasting fossil fuels, CO2 and electricity prices and their volatilities

In the current uncertain context that affects both the world economy and the energy sector, with the rapid increase in the prices of oil and gas and the very unstable political situation that affects some of the largest raw materials’ producers, there is a need for developing efficient and powerful quantitative tools that allow to model and forecast fossil fuel prices, CO2 emission allowances prices as well as electricity prices. This will improve decision making for all the agents involved in energy issues. Although there are papers focused on modelling fossil fuel prices, CO2 prices and electricity prices, the literature is scarce on attempts to consider all of them together. This paper focuses on both building a multivariate model for the aforementioned prices and comparing its results with those of univariate ones, in terms of prediction accuracy (univariate and multivariate models are compared for a large span of days, all in the first 4 months in 2011) as well as extracting common features in the volatilities of the prices of all these relevant magnitudes. The common features in volatility are extracted by means of a conditionally heteroskedastic dynamic factor model which allows to solve the curse of dimensionality problem that commonly arises when estimating multivariate GARCH models. Additionally, the common volatility factors obtained are useful for improving the forecasting intervals and have a nice economical interpretation. Besides, the results obtained and methodology proposed can be useful as a starting point for risk management or portfolio optimization under uncertainty in the current context of energy markets.

Using monthly returns to model conditional heteroscedasticity

This empirical study examines the extent of non-linearity in a multivariate model of monthly financial series. To capture the conditional heteroscedasticity in the series, both the GARCH(1,1) and GARCH(1,1)-in-mean models are employed. The conditional errors are assumed to follow the normal and Student-t distributions. The non-linearity in the residuals of a standard OLS regression are also assessed. It is found that the OLS residuals as well as conditional errors of the GARCH models exhibit strong non-linearity. Under the Student density, the extent of non-linearity in the GARCH conditional errors was generally similar to those of the standard OLS. The GARCH-in-mean regression generated the worse out-of-sample forecasts.

Breaking down the non-normality of daily stock returns

This paper investigates whether the non-normality typically observed in daily stock-market returns could arise because of the joint existence of breaks and GARCH effects. It proposes a data-driven procedure to credibly identify the number and timing of breaks and applies it on the benchmark stock-market indices of 27 OECD countries. The findings suggest that a substantial element of the observed deviations from normality might indeed be due to the co-existence of breaks and GARCH effects. However, the presence of structural changes is found to be the primary reason for the non-normality and not the GARCH effects. Also, there is still some remaining excess kurtosis that is unlikely to be linked to the specification of the conditional volatility or the presence of breaks. Finally, an interesting sideline result implies that GARCH models have limited capacity in forecasting stock-market volatility.

Modelling stock volatilities during financial crises:a time varying coefficient approach

We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the volatility dynamics, including the underlying volatility persistence and volatility spillover structure. Using daily data from several key stock market indices, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying model which provides the platform upon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for time varying asymmetric GARCH specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure.

A dinâmica da taxa de câmbio no Brasil face às operações swap (2002-2015)

This dissertation investigates, based on the Post-Keynesian theory and on its concept of monetary economy of production, the exchange rate behavior of the Brazilian Real in the presence of Brazilian Central Bank's interventions by means of the so-called swap transactions over 2002-2015. Initially, the work analyzes the essential properties of an open monetary economy of production and, thereafter, it presents the basic propositions of the Post-Keynesian view on the exchange rate determination, highlighting the properties of foreign exchange markets and the peculiarities of the Brazilian position into the international monetary and financial system. The research, thereby, accounts for the various segments of the Brazilian foreign exchange market. To accomplish its purpose, we first do a literature review of the Post-Keynesian literature about the topic. Then, we undertake empirical exams of the exchange rate determination using two statistical methods. On the one hand, to measure the volatility of exchange rate, we estimate Auto-regressive Conditional Heteroscedastic (ARCH) and Generalized Auto-regressive Conditional Heteroscedastic (GARCH) models. On the other hand, to measure the variance of the exchange rate in relation to real, financial variables, and the swaps, we estimate a Vector Auto-regression (VAR) model. Both experiments are performed for the nominal and real effective exchange rates. The results show that the swaps respond to exchange rate movements, trying to offset its volatility. This reveals that the exchange rate is, at least in a certain magnitude, sensitive to swaps transactions conducted by the Central Bank. In addition, another empirical result is that the real effective exchange rate responds more to the swaps auctions than the nominal rate.

Eficiência e razão de hedge: uma análise dos mercados futuro brasileiros de boi, café, etanol, milho e soja

This research aims to investigate the Hedge Efficiency and Optimal Hedge Ratio for the future market of cattle, coffee, ethanol, corn and soybean. This paper uses the Optimal Hedge Ratio and Hedge Effectiveness through multivariate GARCH models with error correction, attempting to the possible phenomenon of Optimal Hedge Ratio differential during the crop and intercrop period. The Optimal Hedge Ratio must be bigger in the intercrop period due to the uncertainty related to a possible supply shock (LAZZARINI, 2010). Among the future contracts studied in this research, the coffee, ethanol and soybean contracts were not object of this phenomenon investigation, yet. Furthermore, the corn and ethanol contracts were not object of researches which deal with Dynamic Hedging Strategy. This paper distinguishes itself for including the GARCH model with error correction, which it was never considered when the possible Optimal Hedge Ratio differential during the crop and intercrop period were investigated. The commodities quotation were used as future price in the market future of BM&FBOVESPA and as spot market, the CEPEA index, in the period from May 2010 to June 2013 to cattle, coffee, ethanol and corn, and to August 2012 to soybean, with daily frequency. Similar results were achieved for all the commodities. There is a long term relationship among the spot market and future market, bicausality and the spot market and future market of cattle, coffee, ethanol and corn, and unicausality of the future price of soybean on spot price. The Optimal Hedge Ratio was estimated from three different strategies: linear regression by MQO, BEKK-GARCH diagonal model, and BEKK-GARCH diagonal with intercrop dummy. The MQO regression model, pointed out the Hedge inefficiency, taking into consideration that the Optimal Hedge presented was too low. The second model represents the strategy of dynamic hedge, which collected time variations in the Optimal Hedge. The last Hedge strategy did not detect Optimal Hedge Ratio differential between the crop and intercrop period, therefore, unlikely what they expected, the investor do not need increase his/her investment in the future market during the intercrop