Using new data on returns and risk factors the paper considers the stock performance on the Japanese market, which is the second largest in the world and operates under unique macroeconomic conditions. We find that the CAPM model is not an adequate approach for the Japanese market. The Carhart model performs reasonably well but fails to reject the null hypothesis of a zero intercept for the full period. Extended tests reveal a structural change in asset prices in the year 1998. When separating the sample into two periods, the standard four factor model explains market returns much better. We show that the relation between stock returns and risk factors is affected by macroeconomic conditions, especially when considering the momentum strategy. The Japanese case illustrates the necessity of considering structural instability related to the macroeconomic development, which is especially important for countries and time periods with a sluggish economy.
{"title":"Common Risk Factors and the Macroeconomy: New Evidence from the Japanese Stock Market","authors":"L. Bretschger, F. Lechthaler","doi":"10.2139/ssrn.2044464","DOIUrl":"https://doi.org/10.2139/ssrn.2044464","url":null,"abstract":"Using new data on returns and risk factors the paper considers the stock performance on the Japanese market, which is the second largest in the world and operates under unique macroeconomic conditions. We find that the CAPM model is not an adequate approach for the Japanese market. The Carhart model performs reasonably well but fails to reject the null hypothesis of a zero intercept for the full period. Extended tests reveal a structural change in asset prices in the year 1998. When separating the sample into two periods, the standard four factor model explains market returns much better. We show that the relation between stock returns and risk factors is affected by macroeconomic conditions, especially when considering the momentum strategy. The Japanese case illustrates the necessity of considering structural instability related to the macroeconomic development, which is especially important for countries and time periods with a sluggish economy.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125644696","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The objective of the paper is to examine the possible holiday effects in the stock returns from a group of 28 countries. In our investigation we employ daily values of some representative indexes from January 2000 to December 2011. We split this sample in two sub-samples: before and during the global crisis. We identify the pre or the post holiday effects using regressions with dummy variables. The results indicate significant changes from the pre-crisis period to the crisis period. We find that such changes were more consistent in the case of emerging markets in comparison with the advanced financial markets.
{"title":"Holiday Effects During Quiet and Turbulent Times","authors":"Ramona Dumitriu, R. Stefanescu, C. Nistor","doi":"10.2139/ssrn.2043756","DOIUrl":"https://doi.org/10.2139/ssrn.2043756","url":null,"abstract":"The objective of the paper is to examine the possible holiday effects in the stock returns from a group of 28 countries. In our investigation we employ daily values of some representative indexes from January 2000 to December 2011. We split this sample in two sub-samples: before and during the global crisis. We identify the pre or the post holiday effects using regressions with dummy variables. The results indicate significant changes from the pre-crisis period to the crisis period. We find that such changes were more consistent in the case of emerging markets in comparison with the advanced financial markets.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"316 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115080998","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the weak-form efficiency of Iranian capital market, after the changes in the market regulations. Some events after 2005 have fundamentally changed the environment of the Iranian capital market, and we expect those reforms to increase the market efficiency. Therefore, this research examines the daily returns behavior in Tehran Stock Exchange (TSE) utilizing autocorrelation, augmented Dickey-Fuller, and runs tests over the period of 2005-2010. The results of all tests do not support that TSE daily returns follow a random walk. Therefore, we conclude that it is possible to use the technical skills to attain the abnormal gains.
{"title":"The Investigation of Efficient Market Hypothesis: Evidence from an Emerging Market","authors":"A. Saeedi, Seyed Reza Miraskari, Mehrdad Sadr Ara","doi":"10.2139/ssrn.2042831","DOIUrl":"https://doi.org/10.2139/ssrn.2042831","url":null,"abstract":"This study examines the weak-form efficiency of Iranian capital market, after the changes in the market regulations. Some events after 2005 have fundamentally changed the environment of the Iranian capital market, and we expect those reforms to increase the market efficiency. Therefore, this research examines the daily returns behavior in Tehran Stock Exchange (TSE) utilizing autocorrelation, augmented Dickey-Fuller, and runs tests over the period of 2005-2010. The results of all tests do not support that TSE daily returns follow a random walk. Therefore, we conclude that it is possible to use the technical skills to attain the abnormal gains.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114417291","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This chapter examines the EU Emissions Trading Scheme options and futures markets dynamics during the period 2005–2011. Observations on returns, volatilities and volumes on derivative instruments are studied. In addition, spot/future correlations, term structures and option implied volatility smiles and surfaces are examined. The aim is to ascertain whether the behavior of the EU ETS derivatives markets can be compared to that of commodity markets, specifically the developed West Texas Intermediate (WTI) crude oil derivatives market. The results indicate that the EU Emissions Trading Scheme derivatives markets have matured markedly since the start of Phase 2 of the Scheme, with rising volumes and declining return volatilities. Spot/future correlations, term structures and option volatility smiles and surfaces exhibit comparable behavior over time, albeit with certain discrepancies, with that found in the developed WTI crude oil derivatives market. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the EU Emissions Trading Scheme.
{"title":"Energy Derivatives' Market Dynamics","authors":"Don Bredin, Eamonn O Ciagain, Cal B. Muckley","doi":"10.2139/ssrn.2040828","DOIUrl":"https://doi.org/10.2139/ssrn.2040828","url":null,"abstract":"This chapter examines the EU Emissions Trading Scheme options and futures markets dynamics during the period 2005–2011. Observations on returns, volatilities and volumes on derivative instruments are studied. In addition, spot/future correlations, term structures and option implied volatility smiles and surfaces are examined. The aim is to ascertain whether the behavior of the EU ETS derivatives markets can be compared to that of commodity markets, specifically the developed West Texas Intermediate (WTI) crude oil derivatives market. The results indicate that the EU Emissions Trading Scheme derivatives markets have matured markedly since the start of Phase 2 of the Scheme, with rising volumes and declining return volatilities. Spot/future correlations, term structures and option volatility smiles and surfaces exhibit comparable behavior over time, albeit with certain discrepancies, with that found in the developed WTI crude oil derivatives market. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the EU Emissions Trading Scheme.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131172258","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Various finite difference methods for option pricing have been proposed. In this paper we demonstrate how a very simple approach, namely the repeated spatial extrapolation, can perform extremely better than the finite difference schemes that have been developed so far. In particular, we consider the problem of pricing vanilla and digital options under the Black-Scholes model, and show that, if the payoff functions are dealt with properly, then errors close to the machine precision are obtained in only some hundredths of a second.
{"title":"Repeated Spatial Extrapolation: An Extraordinarily Efficient Approach for Option Pricing","authors":"L. Ballestra","doi":"10.2139/ssrn.2047657","DOIUrl":"https://doi.org/10.2139/ssrn.2047657","url":null,"abstract":"Various finite difference methods for option pricing have been proposed. In this paper we demonstrate how a very simple approach, namely the repeated spatial extrapolation, can perform extremely better than the finite difference schemes that have been developed so far. In particular, we consider the problem of pricing vanilla and digital options under the Black-Scholes model, and show that, if the payoff functions are dealt with properly, then errors close to the machine precision are obtained in only some hundredths of a second.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"2014 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114482398","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns, known as structural breaks. These shifts are endogenously driven by large return shocks (innovations), reflecting large pieces of market news. These shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model: one for the negative shocks and one for the positive shocks. The model can be employed to investigate different sources of stock market volatility shifts driven by market news, without relying on exogenous information. In addition to this, it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility. The above properties of the model are shown based on a study for the US stock market volatility.
{"title":"Shifts in Volatility Driven by Large Stock Market Shocks","authors":"Y. Dendramis, G. Kapetanios, Elias Tzavalis","doi":"10.2139/ssrn.2035390","DOIUrl":"https://doi.org/10.2139/ssrn.2035390","url":null,"abstract":"This paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns, known as structural breaks. These shifts are endogenously driven by large return shocks (innovations), reflecting large pieces of market news. These shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model: one for the negative shocks and one for the positive shocks. The model can be employed to investigate different sources of stock market volatility shifts driven by market news, without relying on exogenous information. In addition to this, it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility. The above properties of the model are shown based on a study for the US stock market volatility.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129681380","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we study the price of Variable Annuity Guarantees, especially of Guaranteed Annuity Options (GAO) and Guaranteed Minimum Income Benefit (GMIB), and this in the settings of a derivative pricing model where the underlying spot (the fund) is locally governed by a geometric Brownian motion with local volatility, while interest rates follow a Hull-White one-factor Gaussian model. Notwithstanding the fact that in this framework, the local volatility depends on a particularly complicated expectation where no closed-form expression exists and it is neither directly related to European call prices or other liquid products, we present in this contribution different methods to calibrate the local volatility model. We further compare Variable Annuity Guarantee prices obtained in three different settings, namely the local volatility, the stochastic volatility and the constant volatility models all combined with stochastic interest rates and show that an appropriate volatility modelling is important for these long-dated derivatives. More precisely, we compare prices of GAO, GMIB Rider and barrier types GAO obtained by using local volatility, stochastic volatility and constant volatility models.
本文研究了可变年金担保的价格，特别是保证年金期权(Guaranteed Annuity Options, GAO)和保证最低收入收益(Guaranteed Minimum Income Benefit, GMIB)，并在衍生品定价模型的设置下进行了研究，其中标的现货(基金)局部受具有局部波动的几何布朗运动控制，而利率遵循Hull-White单因素高斯模型。尽管事实上，在这个框架中，本地波动率取决于一个特别复杂的期望，其中不存在封闭形式的表达式，它既不直接与欧洲看涨价格或其他流动性产品相关，我们在本贡献中提出了不同的方法来校准本地波动率模型。我们进一步比较了三种不同设置下的可变年金担保价格，即本地波动率、随机波动率和结合随机利率的恒定波动率模型，并表明适当的波动率模型对这些长期衍生品很重要。更准确地说，我们比较了使用局部波动率、随机波动率和恒定波动率模型得到的GAO、GMIB Rider和障碍型GAO的价格。
{"title":"Pricing Variable Annuity Guarantees in a Local Volatility Framework","authors":"Grégory Rayée, G. Deelstra","doi":"10.2139/ssrn.2033670","DOIUrl":"https://doi.org/10.2139/ssrn.2033670","url":null,"abstract":"In this paper, we study the price of Variable Annuity Guarantees, especially of Guaranteed Annuity Options (GAO) and Guaranteed Minimum Income Benefit (GMIB), and this in the settings of a derivative pricing model where the underlying spot (the fund) is locally governed by a geometric Brownian motion with local volatility, while interest rates follow a Hull-White one-factor Gaussian model. Notwithstanding the fact that in this framework, the local volatility depends on a particularly complicated expectation where no closed-form expression exists and it is neither directly related to European call prices or other liquid products, we present in this contribution different methods to calibrate the local volatility model. We further compare Variable Annuity Guarantee prices obtained in three different settings, namely the local volatility, the stochastic volatility and the constant volatility models all combined with stochastic interest rates and show that an appropriate volatility modelling is important for these long-dated derivatives. More precisely, we compare prices of GAO, GMIB Rider and barrier types GAO obtained by using local volatility, stochastic volatility and constant volatility models.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132933574","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Following Fama-French (1993), most researchers try to find new risk factors to complement the Fama-French three factors model. Most of them implement by ranking on the desirable risk factors or regression on the risk factors, and then check the beta or risk premium is significant from zero or not, and assess by the increment of the R2 or/and closer of alpha to zero. However, does adding new factors can really solve the puzzle? Unfortunately, this paper’s answers is no. By regression individual’s (or portfolio’s) excess return on the risk factors and rank the error term from the regression, then construct portfolios based on the ranking, you will get the result very similar to that you directly rank the average return of the portfolios. And by constructing portfolios with various kinds of strategies the result is unchanged and robust. That is similar error term have similar return, but this pattern isn’t persistent. When you rank on lag of (at least 1-12 is) error term or return this pattern disappears. This again, however, means no risk factors missing. This is because if there is missing factor, this pattern may survive when rank on lag due to the persistence of risk factor to some extent. Therefore, this pattern is like a puzzle.
{"title":"Is Error Term Residual?","authors":"Jun Hu","doi":"10.2139/ssrn.2032360","DOIUrl":"https://doi.org/10.2139/ssrn.2032360","url":null,"abstract":"Following Fama-French (1993), most researchers try to find new risk factors to complement the Fama-French three factors model. Most of them implement by ranking on the desirable risk factors or regression on the risk factors, and then check the beta or risk premium is significant from zero or not, and assess by the increment of the R2 or/and closer of alpha to zero. However, does adding new factors can really solve the puzzle? Unfortunately, this paper’s answers is no. By regression individual’s (or portfolio’s) excess return on the risk factors and rank the error term from the regression, then construct portfolios based on the ranking, you will get the result very similar to that you directly rank the average return of the portfolios. And by constructing portfolios with various kinds of strategies the result is unchanged and robust. That is similar error term have similar return, but this pattern isn’t persistent. When you rank on lag of (at least 1-12 is) error term or return this pattern disappears. This again, however, means no risk factors missing. This is because if there is missing factor, this pattern may survive when rank on lag due to the persistence of risk factor to some extent. Therefore, this pattern is like a puzzle.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133573008","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Over the past 10 years, central banks and governments throughout the developing world have accumulated foreign exchange reserves and other official assets at an unprecedented rate. This paper shows that this official asset accumulation has driven a substantial portion of the recent large global current account imbalances. These net official capital flows have become large relative to the size of the industrial economies, and they are a significant factor contributing to the weakness of the economic recovery in the major industrial economies.
{"title":"Global Imbalances and Foreign Asset Expansion by Developing Economy Central Banks","authors":"Joseph E. Gagnon","doi":"10.2139/ssrn.2028099","DOIUrl":"https://doi.org/10.2139/ssrn.2028099","url":null,"abstract":"Over the past 10 years, central banks and governments throughout the developing world have accumulated foreign exchange reserves and other official assets at an unprecedented rate. This paper shows that this official asset accumulation has driven a substantial portion of the recent large global current account imbalances. These net official capital flows have become large relative to the size of the industrial economies, and they are a significant factor contributing to the weakness of the economic recovery in the major industrial economies.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"102 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-03-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114463812","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We reconsider the replication problem for contingent claims in a complete market under a general framework. Since there are various limitations in the Black-Scholes pricing formula, we propose a new method to obtain an explicit self-financing trading strategy expression for replications of claims in a general model. The departure of our method from the literature is, using an orthogonal expansion of a process related to the proposed trading strategy, we can construct a complete orthonormal basis for the space of cumulative gains in the complete market so that every self-financing strategy can be expressed as a combination of the basis. Hence, a replication strategy is obtained for a European option. Converse to the traditional Black-Scholes theory, we derive a pricing formula for a European option from the proposed replication strategy that is quite different from the Black-Scholes pricing formula. We then provide an implementation procedure to show how the proposed trading strategy works in practice and then compare with a replication strategy based on the Black-Scholes theory.
{"title":"Solving Replication Problems in Complete Market by Orthogonal Series Expansion","authors":"Jiti Gao, Chaohua Dong","doi":"10.2139/ssrn.2027264","DOIUrl":"https://doi.org/10.2139/ssrn.2027264","url":null,"abstract":"We reconsider the replication problem for contingent claims in a complete market under a general framework. Since there are various limitations in the Black-Scholes pricing formula, we propose a new method to obtain an explicit self-financing trading strategy expression for replications of claims in a general model. The departure of our method from the literature is, using an orthogonal expansion of a process related to the proposed trading strategy, we can construct a complete orthonormal basis for the space of cumulative gains in the complete market so that every self-financing strategy can be expressed as a combination of the basis. Hence, a replication strategy is obtained for a European option. Converse to the traditional Black-Scholes theory, we derive a pricing formula for a European option from the proposed replication strategy that is quite different from the Black-Scholes pricing formula. We then provide an implementation procedure to show how the proposed trading strategy works in practice and then compare with a replication strategy based on the Black-Scholes theory.","PeriodicalId":214104,"journal":{"name":"Econometrics: Applied Econometric Modeling in Financial Economics - Econometrics of Financial Markets eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-03-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114876711","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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