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

There are basic misunderstandings on derivative markets. Some professionals believe that they are a kind of casinos and have no utility for the investors. This work looks at the effects of options introduction in the Brazilian market, seeking for another benefit for this introduction: changes in the stocks risk leveI. Our results are the same found in the US and other markets: the options introduction reduces the stocks volatility. We also found that there is a slight indication that the volatility becames more stochastic with this alternative.

The problem of estimating the volatility of zero coupon bond interest rate

Financial literature and financial industry use often zero coupon yield curves as input for testing hypotheses, pricing assets or managing risk. They assume this provided data as accurate. We analyse implications of the methodology and of the sample selection criteria used to estimate the zero coupon bond yield term structure on the resulting volatility of spot rates with different maturities. We obtain the volatility term structure using historical volatilities and Egarch volatilities. As input for these volatilities we consider our own spot rates estimation from GovPX bond data and three popular interest rates data sets: from the Federal Reserve Board, from the US Department of the Treasury (H15), and from Bloomberg. We find strong evidence that the resulting zero coupon bond yield volatility estimates as well as the correlation coefficients among spot and forward rates depend significantly on the data set. We observe relevant differences in economic terms when volatilities are used to price derivatives.

On the concept of endogenous volatility

Most financial and economic time-series display a strong volatility around their trends. The difficulty in explaining this volatility has led economists to interpret it as exogenous, i.e., as the result of forces that lie outside the scope of the assumed economic relations. Consequently, it becomes hard or impossible to formulate short-run forecasts on asset prices or on values of macroeconomic variables. However, many random looking economic and financial series may, in fact, be subject to deterministic irregular behavior, which can be measured and modelled. We address the notion of endogenous volatility and exemplify the concept with a simple business-cycles model.

Volatility forecasting with range models: An evaluation of new alternatives to the CARR model

The aim of this paper is to analyze the forecasting ability of the CARR model proposed by Chou (2005) using the S&P 500. We extend the data sample, allowing for the analysis of different stock market circumstances and propose the use of various range estimators in order to analyze their forecasting performance. Our results show that there are two range-based models that outperform the forecasting ability of the GARCH model. The Parkinson model is better for upward trends and volatilities which are higher and lower than the mean while the CARR model is better for downward trends and mean volatilities.

Testing for volatility persistence change: The effect of the credit crisis on the Portuguese banks

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

Are one factor logarithmic volatility models useful to fit the features of financial data? An application to microsoft data.

This paper provides empirical evidence that continuous time models with one factor of volatility, in some conditions, are able to fit the main characteristics of financial data. It also reports the importance of the feedback factor in capturing the strong volatility clustering of data, caused by a possible change in the pattern of volatility in the last part of the sample. We use the Efficient Method of Moments (EMM) by Gallant and Tauchen (1996) to estimate logarithmic models with one and two stochastic volatility factors (with and without feedback) and to select among them.

Volatility of Housing

The aim of the project is to develop a theoretical framework where homelessness arises due to various economic and social factors that vary over time. The ultimate goal is i) to understand whether homelessness spells, entrances and exits could be predicted and if so what information is necessary; and ii) to design and evaluate a homelessness prevention programme in a changing and uncertain environment. Examples of the questions we want to answer are: Should it be made easier for people to borrow money so that they can get out of homelessness, or will such borrowing allow people to over-consume today and so fall into homelessness tomorrow? Should precautionary savings be encouraged so that people have cushions to withstand future shocks, or will savings just delay entry into homelessness? What interventions will affect the probability of becoming homeless and how will they affect behaviour? How will interventions affect incentives to save and to consume before homelessness prevention programmes kick in?

The rise and fall of piecework–timework wage differentials: market volatility, labor heterogeneity, and output pricing

Based on detailed payroll data of blue collar male and female labor in Britain’s engineering and metal working industrial sectors between the mid-1920s and mid-1960s, we provide empirical evidence in respect of several central themes in the piecework-timework wage literature. The period covers part of the heyday of pieceworking as well as the start of its post-war decline. We show the importance of relative piece rate flexibility during the Great Depression as well as during the build up to WWII and during the war itself. We account for the very significant decline in the differentials after the war. Labor market topics include piecework pay in respect of compensating differentials, labor heterogeneity, and the transaction costs of pricing piecework output.

Calibration of stochastic volatility models via second order approximation: the Heston model case

Using a suitable Hull and White type formula we develop a methodology to obtain asecond order approximation to the implied volatility for very short maturities. Using thisapproximation we accurately calibrate the full set of parameters of the Heston model. Oneof the reasons that makes our calibration for short maturities so accurate is that we alsotake into account the term-structure for large maturities. We may say that calibration isnot "memoryless", in the sense that the option's behavior far away from maturity doesinfluence calibration when the option gets close to expiration. Our results provide a wayto perform a quick calibration of a closed-form approximation to vanilla options that canthen be used to price exotic derivatives. The methodology is simple, accurate, fast, andit requires a minimal computational cost.

On the relevance of modeling volatility for pricing purposes

This paper presents a two-factor (Vasicek-CIR) model of the term structure of interest rates and develops its pricing and empirical properties. We assume that default free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate and the spread. Assuming a certain process for both factors, a general bond pricing equation is derived and a closed-form expression for bond prices is obtained. Empirical evidence of the model's performance in comparisson with a double Vasicek model is presented. The main conclusion is that the modeling of the volatility in the long-term rate process can help (in a large amount) to fit the observed data can improve - in a reasonable quantity - the prediction of the future movements in the medium- and long-term interest rates. However, for shorter maturities, it is shown that the pricing errors are, basically, negligible and it is not so clear which is the best model to be used.

A Hull and White formula for a general stochastic volatility jump-diffusion model with applications to the study of the short-time behavior of the implied volatility

In this paper, generalizing results in Alòs, León and Vives (2007b), we see that the dependence of jumps in the volatility under a jump-diffusion stochastic volatility model, has no effect on the short-time behaviour of the at-the-money implied volatility skew, although the corresponding Hull and White formula depends on the jumps. Towards this end, we use Malliavin calculus techniques for Lévy processes based on Løkka (2004), Petrou (2006), and Solé, Utzet and Vives (2007).