Unrealized expectations of jumps in volatility: An explanation to the low and time-varying predictive power of implied volatility

The low predictive power of implied volatility in forecasting the subsequently realized volatility is a well-documented empirical puzzle. As suggested by e.g. Feinstein (1989), Jackwerth and Rubinstein (1996), and Bates (1997), we test whether unrealized expectations of jumps in volatility could explain this phenomenon. Our findings show that expectations of infrequently occurring jumps in volatility are indeed priced in implied volatility. This has two important consequences. First, implied volatility is actually expected to exceed realized volatility over long periods of time only to be greatly less than realized volatility during infrequently occurring periods of very high volatility. Second, the slope coefficient in the classic forecasting regression of realized volatility on implied volatility is very sensitive to the discrepancy between ex ante expected and ex post realized jump frequencies. If the in-sample frequency of positive volatility jumps is lower than ex ante assessed by the market, the classic regression test tends to reject the hypothesis of informational efficiency even if markets are informationally effective.

The Influence of World Factors on Finnish Stock Market Volatility

This paper investigates to what extent the volatility of Finnish stock portfolios is transmitted through the "world volatility". We operationalize the volatility processes of Finnish leverage, industry, and size portfolio returns by asymmetric GARCH specifications according to Glosten et al. (1993). We use daily return data for January, 2, 1987 to December 30, 1998. We find that the world shock significantly enters the domestic models, and that the impact has increased over time. This applies also for the variance ratios, and the correlations to the world. The larger the firm, the larger is the world impact. The conditional variance is higher during recessions. The asymmetry parameter is surprisingly non-significant, and the leverage hypothesis cannot be verified. The return generating process of the domestic portfolio returns does usually not include the world information set, thus indicating that the returns are generated by a segmented conditional asset pricing model.

Examining and Modeling the Dynamics of the Volatility Surface

The objective of this paper is to investigate and model the characteristics of the prevailing volatility smiles and surfaces on the DAX- and ESX-index options markets. Continuing on the trend of Implied Volatility Functions, the Standardized Log-Moneyness model is introduced and fitted to historical data. The model replaces the constant volatility parameter of the Black & Scholes pricing model with a matrix of volatilities with respect to moneyness and maturity and is tested out-of-sample. Considering the dynamics, the results show support for the hypotheses put forward in this study, implying that the smile increases in magnitude when maturity and ATM volatility decreases and that there is a negative/positive correlation between a change in the underlying asset/time to maturity and implied ATM volatility. Further, the Standardized Log-Moneyness model indicates an improvement to pricing accuracy compared to previous Implied Volatility Function models, however indicating that the parameters of the models are to be re-estimated continuously for the models to fully capture the changing dynamics of the volatility smiles.

Intraday and Weekend Volatility Patterns- Implications for Option Pricing

This study examines the intraday and weekend volatility on the German DAX. The intraday volatility is partitioned into smaller intervals and compared to a whole day’s volatility. The estimated intraday variance is U-shaped and the weekend variance is estimated to 19 % of a normal trading day. The patterns in the intraday and weekend volatility are used to develop an extension to the Black and Scholes formula to form a new time basis. Calendar or trading days are commonly used for measuring time in option pricing. The Continuous Time using Discrete Approximations model (CTDA) developed in this study uses a measure of time with smaller intervals, approaching continuous time. The model presented accounts for the lapse of time during trading only. Arbitrage pricing suggests that the option price equals the expected cost of hedging volatility during the option’s remaining life. In this model, time is allowed to lapse as volatility occurs on an intraday basis. The measure of time is modified in CTDA to correct for the non-constant volatility and to account for the patterns in volatility.

Volatility Smile Dynamics in Scenario Analysis

The objective of this paper is to suggest a method that accounts for the impact of the volatility smile dynamics when performing scenario analysis for a portfolio consisting of vanilla options. As the volatility smile is documented to change at least with the level of implied at-the-money volatility, a suitable model is here included in the calculation process of the simulated market scenarios. By constructing simple portfolios of index options and comparing the ex ante risk exposure measured using different pricing methods to realized market values, ex post, the improvements of the incorporation of the model are monitored. The analyzed examples in the study generate results that statistically support that the most accurate scenarios are those calculated using the model accounting for the dynamics of the smile. Thus, we show that the differences emanating from the volatility smile are apparent and should be accounted for and that the methodology presented herein is one suitable alternative for doing so.

Pricing Index Options with Stochastic Volatility

The objective of this paper is to investigate the pricing accuracy under stochastic volatility where the volatility follows a square root process. The theoretical prices are compared with market price data (the German DAX index options market) by using two different techniques of parameter estimation, the method of moments and implicit estimation by inversion. Standard Black & Scholes pricing is used as a benchmark. The results indicate that the stochastic volatility model with parameters estimated by inversion using the available prices on the preceding day, is the most accurate pricing method of the three in this study and can be considered satisfactory. However, as the same model with parameters estimated using a rolling window (the method of moments) proved to be inferior to the benchmark, the importance of stable and correct estimation of the parameters is evident.

Crystal growth, transport and magnetic properties of rare-earth manganite Pr1-xPbxMnO3

Crystal growth, electrical and magnetic properties are reported for mixed valence manganite Pr1-xPbxMnO3 (x = 0.2, 0.23, and 0.3). The crystals with x = 0.2 and 0.23 are ferromagnetic and insulating, whereas that with x = 0.3 is ferromagnetic below 200 K and shows an insulator-metal transition at 235 K. This composition shows a magnetoresistance of 90% in a field of 5 T. In the paramagnetic region, the temperature dependence of magnetic susceptibility of the crystals follows a Curie-Weiss behavior. The thermal evolution of magnetization in the ferromagnetic phase varies as T-3/2, in accordance with Bloch's law. The spin-stiffness constant D obtained from the Bloch constant is found to increase linearly with x. The magnetization does not reach complete saturation upto a field of 5 T. A possible contribution of the Pr spins to the total magnetic moment is discussed.

Epitaxial growth of Co3O4 films by low temperature, low pressure chemical vapour deposition

The growth of strongly oriented or epitaxial thin films of metal oxides generally requires relatively high growth temperatures or infusion of energy to the growth surface through means such as ion bombardment. We have grown high quality epitaxial thin films of Co3O4 on different substrates at a temperature as low as 400 degreesC by low-pressure metalorganic chemical vapour deposition (MOCVD) using cobalt(II) acetylacetonate as the precursor. With oxygen as the reactant gas, polycrystalline Co3O4 films are formed on glass and Si (100) in the temperature range 400-550 degreesC. Under similar conditions of growth. highly oriented films of Co3O4 are formed on SrTiO3 (100) and LaAlO3 (100). The activation energy for the growth of polycrystalline films on glass is significantly higher than that for epitaxial growth on SrTiO3 (100). The film on LaAlO3 (100) grown at 450 degreesC shows a rocking curve FWHM of 1.61 degrees, which reduces to 1.32 degrees when it is annealed in oxygen at 725 degreesC. The film on SrTiO3 (100) has a FWHM of 0.33 degrees (as deposited) and 0.29 (after annealing at 725 degreesC). The phi -scan analysis shows cube-on-cube epitaxy on both these substrates. The quality of epitaxy on SrTiO3 (100) is comparable to the best of the perovskite-based oxide thin films grown at significantly higher temperatures. A plausible mechanism is proposed for the observed low temperature epitaxy. (C) 2001 Published by Elsevier Science B.V.

A finite element analysis of quasistatic crack growth in a pressure sensitive constrained ductile layer

Polymeric adhesive layers are employed for bonding two components in a wide variety of technological applications, It has been observed that, unlike in metals, the yield behavior of polymers is affected by the state of hydrostatic stress. In this work, the effect of pressure sensitivity of yielding and layer thickness on quasistatic interfacial crack growth in a ductile adhesive layer is investigated. To this end, finite deformation, finite element analyses of a cracked sandwiched layer are carried out under plane strain, small-scale yielding conditions for a wide range of mode mixities. The Drucker-Prager constitutive equations are employed to represent the behavior of the layer. Crack propagation is simulated through a cohesive zone model, in which the interface is assumed to follow a prescribed traction-separation law. The results show that for a given mode mixity, the steady state Fracture toughness [K](ss) is enhanced as the degree of pressure sensitivity increases. Further, for a given level of pressure sensitivity, [K](ss) increases steeply as mode Il loading is approached. (C) 2000 Elsevier Science Ltd. All rights reserved.