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.

Smiling under stochastic volatility

This paper studies the behavior of the implied volatility function (smile) when the true distribution of the underlying asset is consistent with the stochastic volatility model proposed by Heston (1993). The main result of the paper is to extend previous results applicable to the smile as a whole to alternative degrees of moneyness. The conditions under which the implied volatility function changes whenever there is a change in the parameters associated with Hestons stochastic volatility model for a given degree of moneyness are given.

Autorregresive conditional volatility, skewness and kurtosis

This paper proposes a GARCH-type model allowing for time-varying volatility, skewness and kurtosis. The model is estimated assuming a Gram-Charlier series expansion of the normal density function for the error term, which is easier to estimate than the non-central t distribution proposed by Harvey and Siddique (1999). Moreover, this approach accounts for time-varying skewness and kurtosis while the approach by Harvey and Siddique (1999) only accounts for nonnormal skewness. We apply this method to daily returns of a variety of stock indices and exchange rates. Our results indicate a significant presence of conditional skewness and kurtosis. It is also found that specifications allowing for time-varying skewness and kurtosis outperform specifications with constant third and fourth moments.

Analysis of volatility transmissions in integrated and interconnected markets: The case of the Iberian and French markets

This paper models the mean and volatility spillovers of prices within the integrated Iberian and the interconnected Spanish and French electricity markets. Using the constant (CCC) and dynamic conditional correlation (DCC) bivariate models with three different specifications of the univariate variance processes, we study the extent to which increasing interconnection and harmonization in regulation have favoured price convergence. The data consist of daily prices calculated as the arithmetic mean of the hourly prices over a span from July 1st 2007 until February 29th 2012. The DCC model in which the variances of the univariate processes are specified with a VARMA(1,1) fits the data best for the integrated MIBEL whereas a CCC model with a GARCH(1,1) specification for the univariate variance processes is selected to model the price series in Spain and France. Results show that there are significant mean and volatility spillovers in the MIBEL, indicating strong interdependence between the two markets, while there is a weaker evidence of integration between the Spanish and French markets. We provide new evidence that the EU target of achieving a single electricity market largely depends on increasing trade between countries and homogeneous rules of market functioning.

Spillover of commercially valuable reef fishes from marine protected areas in Guam, Micronesia

Does adult spillover (movement out of marine protected areas [MPAs]) of fish create a net export of fish biomass from MPAs to adjacent fished reefs? Biomass of five commercial reef fish species was estimated by visual census within and outside three MPAs in Guam, Micronesia. For most species and sites, biomass was significantly higher within the MPAs than in adjacent fished sites. Movement of fishes into and out of the MPAs was determined by markrecapture experiments, in which fishes were tagged both inside and outside of MPAs. Four out of five species studied showed little or no net movement out of MPAs. However, the orangespine surgeonfish (Naso lituratus) showed a net spillover of biomass from all three MPAs; 21.5% of tagged individuals and 29% of the tagged biomass emigrated from MPAs. Patterns of spillover were strongly influenced by physical habitat barriers, such as channels, headlands, or other topographic features. MPAs that are physically connected by contiguous reef structures will likely provide more spillover to adjacent fished sites than those that are separated by habitat barriers. This study demonstrates that MPAs can enhance export of fish biomass to fished areas, but spillover is species-specific and depends on factors such as species size and mobility.

How much does the fishery at Apo Island benefit from spillover of adult fish from the adjacent marine reserve?

The contribution of the no-take marine reserve at Apo Island, Philippines, to local fishery yield through “spillover” (net export of adult fish) was estimated. Spatial patterns of fishing effort, yield, and catch rates around Apo Island were documented daily in 2003−2004. Catch rates were higher near the reserve (by a factor of 1.1 to 2.0), but fishing effort was often lowest there. Higher catch rates near the reserve were more likely due to spillover than to low fishing intensity. Lower fishing effort near the reserve may have been due to 1) weather patterns, 2) traditional importance of other fishing grounds, 3) high variability in catch rates, 4) lower market value of target species, and 5) social pressures. The yield taken near the reserve was only 10% of the total yield, but the actual spillover contribution was probably much less than this. This study is one of the few to estimate the spillover contribution to overall yield and to document the responses of fishermen to spil