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on Financial Markets |
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Issue of 2007‒10‒20
five papers chosen by |
| By: | Giovanni Barone-Adesi (University of Lugano and Swiss Finance Institute); Robert F. Engle (New York University, Leonard Stern School of Business); Loriano Mancini (University of Zurich and Swiss Banking Institute) |
| Abstract: | We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework we allow for different distributions of the historical and the pricing return dynamics enhancing the model flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black-Scholes models. Using our GARCH model and a nonparametric approach we obtain decreasing state price densities per unit probability as suggested by economic theory, validating our GARCH pricing model. Implied volatility smiles appear to be explained by the negative asymmetry of the filtered historical innovations. A new simplified delta hedging scheme is presented based on conditions usually found in option markets, namely the local homogeneity of the pricing function. We provide empirical evidence and we quantify the deterioration of the delta hedging in the presence of large volatility shocks. |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0703&r=fmk |
| By: | Peter Bossaerts (California Institute of Technology Centre for Economic Policy Research and Swiss Finance Institute); Charles Plott (California Institute of Technology); William R. Zame (UCLA and California Institute of Technology) |
| Abstract: | Many tests of asset pricing models address only the pricing predictions — but these pricing predictions rest on portfolio choice predictions which seem obviously wrong. This paper suggests a new approach to asset pricing and portfolio choices, based on unobserved heterogeneity. This approach yields the standard pricing conclusions of classical models but is consistent with very different portfolio choices. Novel econometric tests link the price and portfolio predictions and take account of the general equilibrium effects of sample-size bias. The paper works through the approach in detail for the case of the classical CAPM, producing a model called CAPM+€. When these econometric tests are applied to data generated by large-scale laboratory asset markets which reveal both prices and portfolio choices, CAPM+€ is not rejected. |
| Keywords: | experimental finance, experimental asset markets, risk aversion |
| JEL: | C91 C92 D51 G11 G12 |
| Date: | 2003–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0705&r=fmk |
| By: | Canarella, Giorgio; Sapra, Sunil K.; Pollard, Stephen K. |
| Abstract: | In this paper we extend the standard shock spillover model of Bekaert and Harvey (1997), Baele (2003) and Ng (2000) to account for asymmetries of return and volatility spillover effects from the US equity market into Canada and Mexico. Unlike previous research, we model the conditional volatility of the returns in each of the three markets using the asymmetric power model of Ding, Granger and Engle (1993). The empirical results indicate that volatility spillover effects, but not mean spillover effects, exhibit an asymmetric behavior, with negative shocks from the US equity market impacting on the conditional volatility of the Canadian and Mexican equity markets more deeply than positive shocks. |
| Keywords: | APARCH, Asymmetric Spillovers, North American Stock Markets |
| JEL: | C32 C53 F31 G15 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:6162&r=fmk |
| By: | Paolo Emilio Mistrulli (Bank of Italy - Research Department) |
| Abstract: | Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may be a channel allowing a bank default to spread to other banks. This paper analyzes how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Since information on bilateral exposures was not available in most previous studies, they assumed that banks spread their lending as evenly as possible among all the other banks by maximizing the entropy of interbank linkages. Based on the data available on actual bilateral exposures for all Italian banks, the results obtained by assuming the maximum entropy are compared with those reflecting the observed structure of interbank claims. The comparison indicates that, in line with the thesis prevailing in the literature, the maximum entropy method tends to underestimate the extent of contagion. However, this does not hold in general. Under certain circumstances, depending on the structure of the interbank linkages, the recovery rates of interbank exposures and banks’ capitalization, the maximum entropy approach overestimates the scope for contagion. |
| Keywords: | interbank market, financial contagion, systemic risk, maximum entropy |
| JEL: | G21 G28 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_641_07&r=fmk |
| By: | Alessio Anzuini (Bank of Italy, Economic Research Department); Patrizio Pagano (Bank of Italy, Economic Research Department); Massimiliano Pisani (Bank of Italy, Economic Research Department) |
| Abstract: | This paper analyzes the macroeconomic effects on the U.S. economy of news about oil supply by estimating a VAR. Information contained in daily quotations of oil futures contracts is exploited to estimate the dynamic path of oil prices following a shock. Hence, differently from the VAR literature on oil shocks we do not need to rely on recursive identification. Impulse response functions suggest that oil supply disruptions have stagflationary effects on the U.S. economy. Historical decomposition shows that oil shocks contributed significantly to the US recessions of the last thirty years, but not all exogenous increases in oil prices induced a recession. Finally, the contribution of oil shocks to inflation fluctuations seems to have declined over time. |
| Keywords: | vector autoregression, oil shock, futures, news |
| JEL: | C2 E3 O41 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_632_07&r=fmk |