New Economics Papers
on Financial Markets
Issue of 2008‒10‒21
five papers chosen by

  1. Ranking and Combining Volatility Proxies for Garch and Stochastic Volatility Models By Visser, Marcel P.
  2. Differences of opinion, information and the timing of trades By Saffi, Pedro
  3. Price efficiency and short selling By Saffi, Pedro; Sigurdson, Kari
  4. Poor performance of mutual funds in Spain. 1991-2007 By Fernandez, Pablo; Bermejo, Vicente J.; Bilan, Andrada
  5. Pricing and Hedging Asian Basket Spread Options By Griselda Deelstra; Alexandre Petkovic; Michèle Vanmaele

  1. By: Visser, Marcel P.
    Abstract: Daily volatility proxies based on intraday data, such as the high-low range and the realized volatility, are important to the specification of discrete time volatility models, and to the quality of their parameter estimation. The main result of this paper is a simple procedure for combining such proxies into a single, highly efficient volatility proxy. The approach is novel in optimizing proxies in relation to the scale factor (the volatility) in discrete time models, rather than optimizing proxies as estimators of the quadratic variation. For the S&P 500 index tick data over the years 1988-2006 the procedure yields a proxy which puts, among other things, more weight on the sum of the highs than on the sum of the lows over ten-minute intervals. The empirical analysis indicates that this finite-grid optimized proxy outperforms the standard five-minute realized volatility by at least 40%, and the limiting case of the square root of the quadratic variation by 25%.
    Keywords: volatility proxy; realized volatility; quadratic variation; scale factor; arch/garch/stochastic volatility; variance of logarithm
    JEL: G1 C65 C52 C22
    Date: 2008–10–09
  2. By: Saffi, Pedro (IESE Business School)
    Abstract: This paper focuses on the impact that dispersion of opinions and asymmetric information have on turnover near releases of public information, using the probability of information-based trading (PIN) to proxy for information asymmetry and analysts' forecast dispersion for differences of opinion. For earnings announcements of US firms, I find that a one standard deviation increase in dispersion accelerates trading, reducing the difference between turnover around and before announcements by 8.50%. A similar increase in the PIN delays trading, raising the difference by 8.29%. These results help to explain why a large number of events have high turnover before earnings announcements relative to turnover after their release. Furthermore, the information contained in the time-series difference between trading around and before announcements helps to separate the impact of information asymmetry from the impact of proxies for differences of opinion. I also present a theoretical model in which agents who receive private information of heterogeneous quality trade a stock before and after observing a public signal. This public signal is interpreted differently across agents, leading to differences of opinion. I obtain closed-form solutions for expected aggregate volume and its derivatives with respect to these variables, showing that extending static models of asymmetric information is not enough to match the empirical findings.
    Keywords: Trading volume; differences of opinion; information asymmetry;
    JEL: G10 G12 G14
    Date: 2008–04–25
  3. By: Saffi, Pedro (IESE Business School); Sigurdson, Kari (Barclays Global Investors and Reykjavik University)
    Abstract: This paper investigates the effect of short-sale constraints on price efficiency. We use a unique global dataset on equity lending, collected from several custodians, from January 2004 to June 2006. This information is available weekly for 17,015 stocks from 26 countries. Our main findings are as follows. First, stocks with limited lending supply and high borrowing fees respond more slowly to market shocks. Second, short-sale constraints have a small impact on the distribution of weekly stock returns. Limited lending supply is associated with higher skewness, but not with fewer extreme negative returns. Third, stocks with limited lending supply and higher borrowing fees are associated with lower R2s on average.
    Keywords: Short-sales constraints; market efficiency; equity lending;
    JEL: G12 G14 G15
    Date: 2008–04–27
  4. By: Fernandez, Pablo (IESE Business School); Bermejo, Vicente J. (IESE Business School); Bilan, Andrada (IESE Business School)
    Abstract: Over the past 10 and 16 years, the average return on mutual funds in Spain was lower than the average return on government bonds at any term. Over the past 10 years, the average return on the funds was lower than inflation. In spite of these results, on December 31, 2007, 8,264,240 investors held 238.7 billion euros in the 2,907 mutual funds then in existence. During 2007, the number of shareholders fell by 555,569 and the value of their assets, by 6.1%. Only 30 of the 935 mutual funds with a 10-year history outperformed the benchmark and only two of them outperformed the overall index of the Madrid Stock Exchange (ITBM). If in the past 16 years every mutual fund had achieved the benchmark return for its category, the gain in value would have been 180 billion euros, instead of the actual figure of 80 billion euros. Total fees and other expenses for the period amounted to 34 billion euros.
    Keywords: mutual funds; return to shareholders; benchmark; appreciation of the funds:
    JEL: G12 G31 M21
    Date: 2008–04–23
  5. By: Griselda Deelstra; Alexandre Petkovic; Michèle Vanmaele
    Abstract: In this paper we consider the problem of pricing a general Asian basket spread option. We develop approximations formulae based on comonotonicity theory and moment matching methods. We compare their relative performances and explain how to choose the best approximation technique as a function of the Asian basket spread characteristics. We also give the Greeks for our proposed methods. In the last section we extend our results to options denominated in foreign currency.
    Date: 2008

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