Portfolio optimization with options

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

Crashes, volatility, and the equity premium: Lessons from S&P 500 options

We use a novel pricing model to imply time series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex ante risk assessed by investors. Using a simple general equilibrium model, we translate the implied measures of ex ante risk into an ex ante risk premium. The average premium that compensates the investor for the ex ante risks is 70% higher than the premium for realized volatility. The equity premium implied from option prices is shown to significantly predict subsequent stock market returns.

Report of the National Taskforce on Obesity: Obesity - the policy challenges: Executive Summary

The prevalence of overweight and obesity has increased with alarming speed over the past twenty years. It has recently been described by the World Health Organisation as a ‘global epidemic’. In the year 2000 more than 300 million people worldwide were obese and it is now projected that by 2025 up to half the population of the United States will be obese if current trends are maintained. The disease is now a major public health problem throughout Europe. In Ireland at the present time 39% of adults are overweight and 18% are obese. Of these, slightly more men than women are obese and there is a higher incidence of the disease in lower socio-economic groups. Most worrying of all is the fact that childhood obesity has reached epidemic proportions in Europe, with body weight now the most prevalent childhood disease. While currently there are no agreed criteria or standards for assessing Irish children for obesity some studies are indicating that the numbers of children who are significantly overweight have trebled over the past decade. Extrapolation from authoritative UK data suggests that these numbers could now amount to more than 300,000 overweight and obese children on the island of Ireland and they are probably rising at a rate of over 10,000 per year. A balance of food intake and physical activity is necessary for a healthy weight. The foods we individually consume and our participation in physical activity are the result of a complex supply and production system. The growing research evidence that energy dense foods promote obesity is impressive and convincing. These are the foods that are high in fat, sugar and starch. Of these potentially the most significant promoter of weight gain is fat and foods from the top shelf of the food pyramid including spreads (butter and margarine), cakes and biscuits, and confectionery, when combined are the greatest contributors to fat intake in the Irish diet. In company with their adult counterparts Irish children are also consuming large amounts of energy dense foods outside the home. A recent survey revealed that slightly over half of these children ate sweets at least once a day and roughly a third of them had fizzy drinks and crisps with the same regularity. Sugar sweetened carbonated drinks are thought to contribute to obesity and for this reason the World Health Organisation has expressed serious concerns at the high and increasing consumption of these drinks by children. Physical activity is an important determinant of body weight. Over recent decades there has been a marked decline in demanding physical work and this has been accompanied by more sedentary lifestyles generally and reduced leisure-time activity. These observable changes, which are supported by data from most European countries and the United States, suggest that physical inactivity has made a significant impact on the increase in overweight and obesity being seen today. It is now widely accepted that adults shoud be involved in 45-60 minutes, and children should be involved in at least 60 minutes per day of moderate physical activity in order to prevent excess weight gain. Being overweight today not only signals increased risk of medical problems but also exposes people to serious psychosocial problems due mainly to widespread prejudice against fat people. Prejudice against obese people seems to border on the socially acceptable in Ireland. It crops up consistently in surveys covering groups such as employers, teachers, medical and healthcare personnel, and the media. It occurs among adolescents and children, even very young children. Because obesity is associated with premature death, excessive morbidity and serious psychosocial problems the damage it causes to the welfare of citizens is extremely serious and for this reason government intervention is necessary and warranted. In economic terms, a figure of approximately â,¬30million has been estimated for in-patient costs alone in 2003 for a number of Irish hospitals. This year about 2,000 premature deaths in Ireland will be attributed to obesity and the numbers are growing relentlessly. Diseases which proportionally more obese people suffer from than the general population include hypertension, type 2 diabetes, angina, heart attack and osteoarthritis. There are indirect costs also such as days lost to the workplace due to illness arising from obesity and output foregone as a result of premature death. Using the accepted EU environmental cost benefit method, these deaths alone may be costing the state as much as â,¬4bn per year. The social determinants of physical activity include factors such as socio-economic status, education level, gender, family and peer group influences as well as individual perceptions of the benefits of physical activity. The environmental determinants include geographic location, time of year, and proximity of facilities such as open spaces, parks and safe recreational areas generally. The environmental factors have not yet been as well studied as the social ones and this research gap needs to be addressed. Clearly there is a public health imperative to ensure that relevant environmental policies maximise opportunities for active transport, recreational physical activity and total physical activity. It is clear that concerted policy initiatives must be put in place if the predominantly negative findings of research regarding the determinants of food consumption and physical activity are to be accepted, and they must surely be accepted by government if the rapid increase in the incidence of obesity with all its negative consequences for citizens is to be reversed. So far actions surrounding nutrition policies have concentrated mostly on actions that are within the remit of the Department of Health and Children such as implementing the dietary guidelines. These are important but government must now look at the totality of policies that influence the type and supply of food that its citizens eat and the range and quality of opportunities that are available to citizens to engage in physical activity. This implies a fundamental examination of existing agricultural, industrial, economic and other policies and a determination to change them if they do not enable people to eat healthily and partake in physical activity. The current crisis in obesity prevalence requires a population health approach for adults and children in addition to effective weight-reduction management for individuals who are severely overweight. This entails addressing the obesogenic environment where people live, creating conditions over time which lead to healthier eating and more active living, and protecting people from the widespread availability of unhealthy food and beverage options in addition to sedentary activities that take up all of their leisure time. People of course have a fundamental right to choose to eat what they want and to be as active as they wish. That is not the issue. What the National Taskforce on Obesity has had to take account of is that many forces are actively impeding change for those well aware of the potential health and well-being consequences to themselves of overweight and obesity. The Taskforce’s social change strategy is to give people meaningful choice. Choice, or the capacity to change (because the strategy is all about change), is facilitated through the development of personal skills and preferences, through supportive and participative environments at work, at school and in the local community, and through a dedicated and clearly communicated public health strategy. High-level cabinet support will be necessary to implement the Taskforce’s recommendations. The approach to implementation must be characterised by joined-up thinking, real practical engagement by the public and private sectors, the avoidance of duplication of effort or crosspurpose approaches, and the harnessing of existing strategies and agencies. The range of government departments with roles to play is considerable. The Taskforce outlines the different contributions that each relevant department can make in driving its strategy forward. It also emphasises its requirement that all phases of the national strategy for healthy eating and physical activity are closely monitored, analysed and evaluated. The vision of the Taskforce is expressed as: An Irish society that enables people through health promotion, prevention and care to achieve and maintain healthy eating and active living throughout their lifespan. Its high-level goals are expressed as follows: Its recommendations, over eighty in all, relate to actions across six broad sectors: high-level government; education; social and community; health; food, commodities, production and supply; and the physical environment. In developing its recommendations the Taskforce has taken account of the complex, multisectoral and multi-faceted determinants of diet and physical activity. This strategy poses challenges for government, within individual departments, inter-departmentally and in developing partnerships with the commercial sector. Equally it challenges the commercial sector to work in partnership with government. The framework required for such initiative has at its core the rights and benefits of the individual. Health promotion is fundamentally about empowerment, whether at the individual, the community or the policy level.

Australian Asian options

We study European options on the ratio of the stock price to its averageand viceversa. Some of these options are traded in the Australian StockExchange since 1992, thus we call them Australian Asian options. Forgeometric averages, we obtain closed-form expressions for option prices.For arithmetic means, we use dierent approximations that produce verysimilar results.

VIX as a stock market indicator

The goal of this research was to make an overall sight to VIX and how it can be used as a stock market indicator. Volatility index, often referred as the fear index, measures how much does it cost for investor to protect his/hers S&P 500 position from fluctuations with options. Over the relatively short history of VIX it has succesfull timing coordinator and it has told about the market state adding its own psychological view of the amount of fear and greed.

The Forecast Performance of Model-Free Implied Volatility: Evidence from DAX Index Options

Volatility has a central role in various theoretical and practical applications in financial markets. These include the applications related to portfolio theory, derivatives pricing and financial risk management. Both theoretical and practical applications require good estimates and forecasts for the asset return volatility. The goal of this study is to examine the forecast performance of one of the more recent volatility measures, model-free implied volatility. Model-free implied volatility is extracted from the prices in the option markets, and it aims to provide an unbiased estimate for the market’s expectation on the future level of volatility. Since it is extracted from the option prices, model-free implied volatility should contain all the relevant information that the market participants have. Moreover, model-free implied volatility requires less restrictive assumptions than the commonly used Black-Scholes implied volatility, which means that it should be less biased estimate for the market’s expectations. Therefore, it should also be a better forecast for the future volatility. The forecast performance of model-free implied volatility is evaluated by comparing it to the forecast performance of Black-Scholes implied volatility and GARCH(1,1) forecast. Weekly forecasts for six years period were calculated for the forecasted variable, German stock market index DAX. The data consisted of price observations for DAX index options. The forecast performance was measured using econometric methods, which aimed to capture the biasedness, accuracy and the information content of the forecasts. The results of the study suggest that the forecast performance of model-free implied volatility is superior to forecast performance of GARCH(1,1) forecast. However, the results also suggest that the forecast performance of model-free implied volatility is not as good as the forecast performance of Black-Scholes implied volatility, which is against the hypotheses based on theory. The results of this study are consistent with the majority of prior research on the subject.

Nonparametric tail risk, macroeconomics and stock returns: predictability and risk premia

This paper proposes a new novel to calculate tail risks incorporating risk-neutral information without dependence on options data. Proceeding via a non parametric approach we derive a stochastic discount factor that correctly price a chosen panel of stocks returns. With the assumption that states probabilities are homogeneous we back out the risk neutral distribution and calculate five primitive tail risk measures, all extracted from this risk neutral probability. The final measure is than set as the first principal component of the preliminary measures. Using six Fama-French size and book to market portfolios to calculate our tail risk, we find that it has significant predictive power when forecasting market returns one month ahead, aggregate U.S. consumption and GDP one quarter ahead and also macroeconomic activity indexes. Conditional Fama-Macbeth two-pass cross-sectional regressions reveal that our factor present a positive risk premium when controlling for traditional factors.

From capital surges to drought: seeking stability for emerging economies

Includes bibliography

Social dimensions of macroeconomic policy: report of the Executive Committee on Economic and Social Affairs of the United Nations

Introduction The social agenda is long-term in nature, in the sense that poverty alleviation along with a better distribution of income, wealth and opportunities are long-term goals. A sound macroeconomic policy, on the other hand, has to do largely with the consistent management of short-term policy instruments pursuing a sustainable and predictable pace for aggregate economic variables and major prices (wages, inflation, interest rates and exchange rates). In spite of the different arena and rationale in which they play, there are strong links between the two. First and most obvious, macroeconomic adjustment and structural reform are more likely to be sustainable when they are equitable. Second, social intervention —i.e., policies, programmes and reforms aimed at improving social performance in the long run—, needs stable funding which is not always available in view of macroeconomic constraints. Third, macroeconomic instability —especially episodes of recession or hyperinflation— increases poverty and inequality, while restoring macroeconomic equilibrium does not restore previous social balances. Finally, there is no unique macroeconomic policy mix to tackle a given situation, and the policy options may not be neutral from a social standpoint. Monetary, fiscal and exchange rate policies, together with structural reform, have major consequences for the social wellbeing of societies, not only in terms of protection against shocks and crises but also in terms of equity. Many, if not all, of the necessary social policies are of a domestic nature. This report thus concentrates on domestic strategies aimed at maximizing the linkages between consistent macroeconomic policies and social progress. Pursuing them, however, depends to a considerable extent on the international enabling environment in which the global financial system, the unsettled debt crisis and increasing ODA flows play a significant role. Countries operate in a world economy where market players everywhere immediately scrutinize domestic monetary, financial or fiscal policy decisions and the performance of exchange rate regimes of individual countries. Under these conditions, the room for manoeuvre of policymakers has become considerably constrained. Consequently, it is becoming increasingly complex to incorporate the social dimensions into such policy decisions, to the extent that external analysts consider that authorities are sacrificing sound macroeconomic policies. The main message of the report is that the expediency of short-term economic efficiency as embedded in much of the advice on macroeconomic stability needs to be tempered by long-term development objectives. The report starts with a short historical background which describes the ascendancy of macroeconomic policies over social development policies (chapter I). It continues with an evaluation of the relation between macroeconomic consistency and social effort (chapter II), and the importance of sustainable and stable growth for social progress (chapter III). The report then turns to the need for an equity-enhancing growth strategy (chapter IV) and an analysis of the priorities of social policies in an integrated approach to growth (chapter V). The final chapter adds some final institutional remarks.

Essays On CEO Compensation: New Evidence On The Managerial-Power Vs. Optimal Contracting Debate

This dissertation analyzes the effect of market analysts’ expectations of share prices (price targets) on executive compensation. It examines how well the estimated effects of price targets on compensation fit with two competing views on determining executive compensation: the arm’s length bargaining model, which assumes that a board seeks to maximize shareholders’ interests, and the managerial power model, which assumes that a board seeks to maximize managers’ compensation (Bebchuk et al. 2005). The first chapter documents the pattern of CEO pay from fiscal year 1996 to 2010. The second chapter analyzes the Institutional Broker Estimate System Detail History Price Target data file, which that reports analysts’ price targets for firms. I show that the number of price target announcements is positively associated with company share price’s volatility, that price targets are predictive of changes in the value of stocks, and that when analysts announce positive (negative) expectations of future stock price, share prices change in the same direction in the short run. The third chapter analyzes the effect of price targets on executive compensation. I find that analysts' price targets alter the composition of executive pay between cash-based compensation and stock-based compensation. When analysts forecast a rise (fall) in the share price for a firm, the compensation package tilts toward stock-based (cash-based) compensation. The substitution effect is stronger in companies that have weaker corporate governance. The fourth chapter explores the effect of the introduction of the Sarbanes-Oxley Act (SOX) in 2002 and its reinforcement in 2006 on the options granting process. I show that the introduction of SOX and its reinforcement eliminated the practice of backdating options but increased “spring-loading” of option grants around price targets announcements. Overall, the dissertation shows that price targets provide insights into the determinants of executive pay in favor of the managerial power model.

Canadian Cardiovascular Society 2009 Consensus Conference on the management of adults with congenital heart disease: executive summary

With advances in pediatric cardiology and cardiac surgery, the population of adults with congenital heart disease (CHD) has increased. In the current era, there are more adults with CHD than children. This population has many unique issues and needs. They have distinctive forms of heart failure, and their cardiac disease can be associated with pulmonary hypertension, thromboemboli, complex arrhythmias and sudden death.Medical aspects that need to be considered relate to the long-term and multisystemic effects of single-ventricle physiology, cyanosis, systemic right ventricles, complex intracardiac baffles and failing subpulmonary right ventricles. Since the 2001 Canadian Cardiovascular Society Consensus Conference report on the management of adults with CHD, there have been significant advances in the understanding of the late outcomes, genetics, medical therapy and interventional approaches in the field of adult CHD. Therefore, new clinical guidelines have been written by Canadian adult CHD physicians in collaboration with an international panel of experts in the field. The present executive summary is a brief overview of the new guidelines and includes the recommendations for interventions. The complete document consists of four manuscripts that are published online in the present issue of The Canadian Journal of Cardiology, including sections on genetics, clinical outcomes, recommended diagnostic workup, surgical and interventional options, treatment of arrhythmias, assessment of pregnancy and contraception risks, and follow-up requirements. The complete document and references can also be found at www.ccs.ca or www.cachnet.org.

Executive compensation and the performance of the firm

A sample of large industrial corporations is examined to determine whether there is a relationship between the levels of compensation received by the senior executives of those firms and the firms' economic performances. We find consistent evidence of such a relationship, with differences across firms in the total compensation of their three highest-paid officers being positively related to differences in both the common stock returns and operating profitability of the firms. The implication is that compensation packages are designed to reduce agency costs.

Assessing dynamics of forced livestock movements, livelihoods and future development options for pastoralists/agro-pastoralists in Ruvuma and Lindi Regions, in the Southern Tanzania

The study that aimed at understanding the dynamics of forced livestock movements and pastoral livelihood and development options was conducted in Lindi and Ruvuma regions, using both formal and informal approaches. Data were collected from 60 randomly selected Agro-pastoralists/Pastoralists and native farmers using a structured questionnaire. Four villages were involved; two in Lindi region (Matandu and Mkwajuni) and the other two in Ruvuma region (Gumbiro and Muhuwesi). Data were analyzed using descriptive statistics of SPSS to generate means and frequencies. The results indicate that a large number of animals moved into the study area following the eviction order of the government in Ihefu wetlands in 2006/2007. Lindi region was earmarked by the government to receive all the evicted pastoralists. However, by 2008 only 30% of the total cattle that were expected to move into the region had been received. Deaths of many animals on transit, selling of the animals to pay for transportation and other costs while on transit and many pastoralists settling in Coastal and Ruvuma regions before reaching their destinations were reported to be the reasons for the discrepancy observed. To mitigate anticipated conflicts between farmers and pastoralists, Participatory Land Use Management (PLUM) plans were developed in all the study villages in order to demarcate village land area into different uses, including grazing, cropping, settlement and forests. Land units for grazing were supposed to be provided with all necessary livestock infrastructures (dips, charcoal dams, livestock markets and stock routes). However, the land use plans were not able to prevent the anticipated conflicts because most of the livestock infrastructures were lacking, the land use boundaries were not clearly demarcated and there was limited enforcement of village by-laws, since most had not been enacted by the respective district councils. Similarly, the areas allocated for grazing were inadequate for the number of livestock available and thus the carrying capacity exceeded. Thus, land resource-based conflicts between farmers and pastoralists were emerging in the study areas for the reason that most of the important components in the PLUM plans were not in place. Nevertheless, the arrival of pastoralists in the study areas had positive effects on food security and growth of social interactions between pastoralists and farmers including marriages between them. Environmental degradations due to the arrival of livestock were also not evident. Thus, there is a need for the government to purposely set aside enough grazing land with all necessary infrastructures in place for the agro-pastoral/pastoral communities in the country.

A note on execution costs for stock index futures: Information versus liquidity effects

This paper examines execution costs and the impact of trade size for stock index futures using price-volume transaction data from the London International Financial Futures and Options Exchange. Consistent with Subrahmanyam [Rev. Financ. Stud. 4 (1991) 11] we find that effective half spreads in the stock index futures market are small compared to stock markets, and that trades in stock index futures have only a small permanent price impact. This result is important as it helps to better understand the success of equity index products such as index futures and Exchange Traded Funds. We also find that there is no asymmetry in the post-trade price reaction between purchases and sales for stock index futures across various trade sizes. This result is consistent with the conjecture in Chan and Lakonishok [J. Financ. Econ. 33 (1993) 173] that the asymmetry surrounding block trades in stock markets is due to the high cost of short selling and the general reluctance of traders to short sell on stock markets. (C) 2004 Elsevier B.V. All rights reserved.