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on Market Microstructure |
| By: | David E. Allen (School of Accounting, Finance and Economics,); Michael McAleer (Econometric Institute,); Marcel Scharth (VU University Amsterdam) |
| Abstract: | In this paper we document that realized variation measures constructed from high-frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Carefully modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility (DARV) model, which incorporates the important fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf197&r=mst |
| By: | Mancini Griffoli, Tommaso (Swiss National Bank); Ranaldo, Angelo (Swiss National Bank) |
| Abstract: | Arbitrage normally ensures that covered interest parity (CIP) holds. Until recently, excess profits, if any, were documented to last merely seconds and reach a few pips. Instead, this paper finds that following the Lehman bankruptcy, these were large, persisted for months and involved strategies short in dollars. Profits are estimated by specifying the arbitrage strategy as a speculator would actually implement it, considering both unsecured and secured funding. Either way, it seems that dollar funding constraints kept traders from arbitraging away excess profits. The claim finds support in an empirical analysis drawing on several novel high frequency datasets of synchronous quotes across securities, including transaction costs. |
| Keywords: | arbitrage limits; covered interest parity; funding liquidity; financial crisis |
| JEL: | F31 G14 |
| Date: | 2010–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2010_014&r=mst |