New Economics Papers
on Financial Markets
Issue of 2009‒10‒24
six papers chosen by

  1. Herding, Contrarianism and Delay in Financial Market Trading By Park, A.; Sgroi, D.
  2. Volatility Indexes seem to point to the Past By Schroeder, Gerhard
  3. The skew pattern of implied volatility in the DAX index options market By Silvia Muzzioli
  4. "A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options" By Chatayan Wiphatthanananthakul; Michael McAleer
  5. Financial Liberalisation and Stock Market Volatility: The Case of Indonesia By Gregory James; Michail Karoglou
  6. The Current Economic Crisis: Causes, Cures and Consequences By Karl Aiginger

  1. By: Park, A.; Sgroi, D.
    Abstract: Herding and contrarian behavior are often-cited features of real-world financial markets. Theoretical models of continuous trading that study herding and contrarianism, however, usually do not allow traders to choose when to trade or to trade more than once. We present a large-scale experiment to explore these features within a tightly controlled laboratory environment. Herding and contrarianism are significantly more pronounced than in compa- rable studies that do not allow traders to time their decisions. Traders with extreme information tend to trade earliest, followed by those with information conducive to contrarianism, while those with the theoretical potential to herd delay the most.
    Keywords: Herding, Contrarianism, Endogenous-time Trading, Experiments
    JEL: C91 D82 G14
    Date: 2009–10–12
  2. By: Schroeder, Gerhard
    Abstract: In theory, by trading options, market participants asses and set future volatilities that can be identified using the Black-Scholes-formula in reverse. In reality, as regression analysis suggests, it is historical market data which instead are used to determine future values. Further analysis shows that historical volatilities are insufficient predictors. Yet this questionable practice is considered by international accounting standards (IAS/IFRS) to allow "historical data and implied volatilities" for "reasonable estimations". In a kind of short-circuit, historical volatilities are introduced into option trading and returned as implied volatilities. In reality, both differ significantly from future values. Comparing the volatility of the past nine weeks with that of the following nine weeks, estimation error ranges from four to over ten percentage points. (No paper found in the net challenging the implied hypothesis of IAS 39/AG82(f))
    Keywords: Volatility; Prediction; EU Accounting Standards; IAS; Correlation; GARCH; Derivatives;
    JEL: F37 B23 H83 E44 C1
    Date: 2009–10–20
  3. By: Silvia Muzzioli
    Abstract: The aim of this paper is twofold: to investigate how the information content of implied volatility varies according to moneyness and option type and to compare the latter option based forecasts with historical volatility in order to see if they subsume all the information contained in the latter. We run a horse race of different implied volatility estimates: at the money and out of the money call and put implied volatilities and average implied that is a weighted average of at the money call and put implied volatilities with weights proportional to trading volume. Two hypotheses are tested: unbiasedness and efficiency of the different volatility forecasts. The investigation is pursued in the Dax index options market, by using synchronous prices matched in a one minute interval. The results highlight that the information content of implied volatility has a humped shape, with out of the money options being less informative than at the money ones. Overall, the best forecast is at the money put implied volatility: it is unbiased (after a constant adjustment) and efficient, in that it subsumes all the information contained in historical volatility.
    Keywords: implied Volatility; volatility Smile; volatility forecasting; option type
    JEL: G13 G14
    Date: 2009–07
  4. By: Chatayan Wiphatthanananthakul (Faculty of Economics,Chiang Mai University and Chulachomklao Royal Military Academy); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo)
    Abstract: In 2003, the Chicago Board Options Exchange (CBOE) made two key enhancements to the volatility index (VIX) methodology based on S&P options. The new VIX methodology seems to be based on a complicated formula to calculate expected volatility. In this paper, with the use of Thailand's SET50 Index Options data, we modify the apparently complicated VIX formula to a simple relationship, which has a higher negative correlation between the VIX for Thailand (TVIX) and SET50 Index Options. We show that TVIX provides more accurate forecasts of option prices than the simple expected volatility (SEV) index, but the SEV index outperforms TVIX in forecasting expected volatility. Therefore, the SEV index would seem to be a superior tool as a hedging diversification tool because of the high negative correlation with the volatility index.
    Date: 2009–09
  5. By: Gregory James (Dept of Economics, Loughborough University); Michail Karoglou (Business School, Newcastle University)
    Abstract: This paper examines the relationship between financial liberalisation and stock market volatility in Indonesia. By looking at the time series properties of the Jakarta Composite Index (JCI) we identify breaks in stock market volatility which coincide with the timing of major policy events. Our main findings are (i) a significant decrease in volatility after the "official" opening of the stock market to foreign participation; (ii) a significant increase in volatility in the year before market opening following reforms that eased entry requirements and the issuance of brokerage licenses; and (iii) a significant increase in volatility at the time of the Asian crisis followed by a significant decrease in the second and sixth years after the crisis.
    Keywords: financial liberalisation; stock market volatility; Indonesia; Asian crisis.
    JEL: G14 G15
    Date: 2009–09
  6. By: Karl Aiginger (WIFO)
    Abstract: The financial crisis has brought about an economic recession which is more severe and widespread than any decline in production in the past 50 years. In the USA and Europe the decline in production over the entire economy was however much less than during the Great Depression of the 1930ies. Only in manufacturing has the decline in some quarters of 2008-09 been similarly sharp. This time, however, the economic policy makers reacted differently. The high income levels at the start of the crisis and the social systems in place were able to cushion the fall. The roots of the crisis are not only to be found in the financial sector but also in macroeconomic imbalances, in regulation failures and insufficient policy coordination. Previous experience shows that the length of the crisis will be different for the financial markets, for the housing sector, for production and for employment, and that recovery could be slow, bumpy and fragile. Different approaches of economic policy are being systematically compared and we already discuss how the crisis can actually be turned into an opportunity. One even dares to suggest that some of the elements of the European Model (long-term orientation, stakeholder model) could serve as an example to the world, even if the crisis management in Europe is not without fault, and despite the fact that in the USA and China economic policy is reacting more decisively. It is necessary to coordinate European policy more closely internally as well as with those of the USA and of the dynamic economies of neighbouring countries and Asia in order to avoid further crises, and proactively to tackle worldwide problems such as climate change, and raw materials and food shortages.
    Date: 2009–08–24

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