Download or read book Testing for Jumps and Modeling Volatility in Asset Prices written by Johan Bjursell and published by . This book was released on 2009 with total page 320 pages. Available in PDF, EPUB and Kindle. Book excerpt: Observers of financial markets have long noted that asset prices are very volatile and commonly exhibit jumps (price spikes). Thus, the assumption of a continuous process for asset price behavior is often violated in practice. Although empirical studies have found that the impact of such jumps is transitory, the shortterm effect in the volatility may nonetheless be considerable with important financial implications for the valuation of derivatives, asset allocation and risk management. This dissertation contributes to the literature in two areas. First, I evaluate the small sample properties of a nonparametric method for identifying jumps. I focus on the implication of adding noise to the prices and recent methods developed to contend with such market frictions. Initially, I examine the properties and convergence results of the power variations that constitute the jump statistics. Then I document the asymptotic results of these jump statistics. Finally, I estimate their size and power. I examine these properties using a stochastic volatility model incorporating alternative noise and jump processes. I find that the properties of the statistics remain close to the asymptotics when methods for managing the effects of noise are applied judiciously. Improper use leads to invalid tests or tests with low power. Empirical evidence demonstrates that the nonparametric method performs well for alternative models, noise processes, and jump distributions. In the second essay, I present a study on market data from U.S. energy futures markets. I apply a nonparametric method to identify jumps in futures prices of crude oil, heating oil and natural gas contracts traded on the New York Mercantile Exchange. The sample period of the intraday data covers January 1990 to January 2008. Alternative methods such as staggered returns and optimal sampling frequency methods are used to remove the effects of microstructure noise which biases the tests against detecting jumps. I obtain several important empirical results: (i) The realized volatility of natural gas futures exceeds that of heating oil and crude oil. (ii) In these commodities, large volatility days are often associated with large jump components and large jump components are often associated with weekly announcements of inventory levels. (iii) The realized volatility and smooth volatility components in natural gas and heating oil futures are higher in winter months than in summer months. Moreover, cold weather and inventory surprises cause the volatility in natural gas and heating oil to increase during the winter season. (iv) The jump component produces a transitory surge in total volatility, and there is a strong reversal in volatility on days following a significant jump day. (v) I find that including jump and seasonal components as explanatory variables significantly improves the modeling and forecasting of the realized volatility.

Download or read book A Simple Robust Test for the Presence of Jumps in Asset Prices written by Peter Carr and published by . This book was released on 2001 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a simple robust test for the presence of jumps in the price of an asset underlying an option. Our test examines the prices of at and out-of-the-money options as the time to maturity of the option approaches zero. We show that these prices converge to zero at speeds which depend on whether the price process is pure diffusion, pure jump, or a mixture of both. By applying our test to Samp;P 500 options data, we conclude that this index contains a jump component. Furthermore, there are strong indications of both a diffusion component and stochastic volatility.

Download or read book Handbook of Volatility Models and Their Applications written by Luc Bauwens and published by John Wiley & Sons. This book was released on 2012-03-22 with total page 566 pages. Available in PDF, EPUB and Kindle. Book excerpt: A complete guide to the theory and practice of volatility models in financial engineering Volatility has become a hot topic in this era of instant communications, spawning a great deal of research in empirical finance and time series econometrics. Providing an overview of the most recent advances, Handbook of Volatility Models and Their Applications explores key concepts and topics essential for modeling the volatility of financial time series, both univariate and multivariate, parametric and non-parametric, high-frequency and low-frequency. Featuring contributions from international experts in the field, the book features numerous examples and applications from real-world projects and cutting-edge research, showing step by step how to use various methods accurately and efficiently when assessing volatility rates. Following a comprehensive introduction to the topic, readers are provided with three distinct sections that unify the statistical and practical aspects of volatility: Autoregressive Conditional Heteroskedasticity and Stochastic Volatility presents ARCH and stochastic volatility models, with a focus on recent research topics including mean, volatility, and skewness spillovers in equity markets Other Models and Methods presents alternative approaches, such as multiplicative error models, nonparametric and semi-parametric models, and copula-based models of (co)volatilities Realized Volatility explores issues of the measurement of volatility by realized variances and covariances, guiding readers on how to successfully model and forecast these measures Handbook of Volatility Models and Their Applications is an essential reference for academics and practitioners in finance, business, and econometrics who work with volatility models in their everyday work. The book also serves as a supplement for courses on risk management and volatility at the upper-undergraduate and graduate levels.

Download or read book Testing for Jumps When Asset Prices are Observed with Noise A Swap Variance Approach written by George J. Jiang and published by . This book was released on 2008 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a new test for jumps in asset prices that is motivated by the literature on variance swaps. Formally, the test follows by a direct application of Ito's lemma to the semi-Martingale process of asset prices and derives its power from the impact of jumps on the third and higher order return moments. Intuitively, the test statistic reflects the cumulative gain of a variance swap replication strategy which is known to be minimal in the absence of jumps but substantial in the presence of jumps. Simulations show that the jump test has nice properties and is generally more powerful than the widely used bi-power variation test. An important feature of our test is that it can be applied - in analytically modified form - to noisy high frequency data and still retains power. As a by-product of our analysis, we obtain novel analytical results regarding the impact of noise on bi-power variation. An empirical illustration using IBM trade data is also included.

Download or read book Testing Option Pricing Models written by David Scott Bates and published by . This book was released on 1995 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper discusses the commonly used methods for testing option pricing models, including the Black-Scholes, constant elasticity of variance, stochastic volatility, and jump-diffusion models. Since options are derivative assets, the central empirical issue is whether the distributions implicit in option prices are consistent with the time series properties of the underlying asset prices. Three relevant aspects of consistency are discussed, corresponding to whether time series-based inferences and option prices agree with respect to volatility, changes in volatility, and higher moments. The paper surveys the extensive empirical literature on stock options, options on stock indexes and stock index futures, and options on currencies and currency futures

Download or read book An Empirical Study on Jumps in Asset Prices Using High frequency Data written by Ping-Chen Tsai and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic Volatility Jumps and Variance Risk Premia written by Worapree Maneesoonthorn and published by . This book was released on 2013 with total page 604 pages. Available in PDF, EPUB and Kindle. Book excerpt: Planning for future movements in asset prices and understanding the variation in the return on assets are key to the successful management of investment portfolios. This thesis investigates issues related to modelling both asset return volatility and the large movements in asset prices that may be induced by the events in the general economy, as random processes, with the implications for risk compensation and the prediction thereof being a particular focus. Exploiting modern numerical Bayesian tools, a state space framework is used to conduct all inference, with the thesis making three novel contributions to the empirical finance literature. First, observable measures of physical and option-implied volatility on the S&P 500 market index are combined to conduct inference about the latent spot market volatility, with a dynamic structure specified for the variance risk premia factored into option prices. The pooling of dual sources of information, along with the use of a dynamic model for the risk premia, produces insights into the workings of the U.S. markets, plus yields accurate forecasts of several key variables, including over the recent period of stock market turmoil. Second, a new continuous time asset pricing model allowing for dynamics in, and interactions between, the occurrences of price and volatility jumps is proposed. Various hypotheses about the nature of extreme movements in both S&P 500 returns and the volatility of the index are analyzed, within a state space model in which the usual returns measure is supplemented by direct measures of physical volatility and price jumps. The empirical results emphasize the importance of modelling both types of jumps, with the link between the intensity of volatility jumps and certain key extreme events in the economy being drawn. Finally, an empirical exploration of an alternative framework for the statistical evaluation of price jumps is conducted, with the aim of comparing the resultant measures of return variance and jumps with those induced by more conventional methods. The empirical analysis sheds light on the potential impact of the method of measurement construction on inference about the asset pricing process, and ultimately any financial decisions based on such inference.

Download or read book Testing Option Pricing Models written by David S. Bates and published by . This book was released on 2010 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper discusses the commonly used methods for testing option pricing models, including the Black-Scholes, constant elasticity of variance, stochastic volatility, and jump-diffusion models. Since options are derivative assets, the central empirical issue is whether the distributions implicit in option prices are consistent with the time series properties of the underlying asset prices. Three relevant aspects of consistency are discussed, corresponding to whether time series-based inferences and option prices agree with respect to volatility, changes in volatility, and higher moments. The paper surveys the extensive empirical literature on stock options, options on stock indexes and stock index futures, and options on currencies and currency futures.

Download or read book Jumps in Financial Markets written by Suzanne S. Lee and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article introduces a new nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra-day level. We demonstrate that the likelihood of misclassification of jumps becomes negligible when we use high-frequency returns. Using our test, we examine jump dynamics and their distributions in the U.S. equity markets. The results show that individual stock jumps are associated with prescheduled earnings announcements and other company-specific news events. Additionally, Samp;P 500 Index jumps are associated with general market news announcements. This suggests different pricing models for individual equity options versus index options.

Download or read book Volatility Analysis and Asset Pricing of Stock Portfolios written by Klaus Grobys and published by BoD – Books on Demand. This book was released on 2009 with total page 142 pages. Available in PDF, EPUB and Kindle. Book excerpt: Since a vast number of investment funds are available at the market, it may be difficult for investors to figure out which fund might serve their needs the best. Especially in times where the uncertainty in the market increases, it might be even more important to figure out how investment funds response to such volatility shocks. Volatility as a risk measure may not be constant over time, but tight connected to the market risk in contrast. Hence, the exploration of the investment fund's volatility response to shocks in the stock market may give a deeper understanding of what the actual risk of an investor might be.

Download or read book Price and Volatility Co Jumps written by Federico M. Bandi and published by . This book was released on 2014 with total page 75 pages. Available in PDF, EPUB and Kindle. Book excerpt: The dependence between the magnitudes of discontinuous changes in asset prices and contemporaneous discontinuous changes in volatility (co-jumps) is a fundamental aspect of the price process contributing, among other effects, to skewness in the return distribution. Yet, its nature has been reported by many as being - in terms of sign, magnitude, and statistical significance - largely elusive. Using a novel identification strategy for stochastic volatility modelling in continuous time relying on trade-level information for spot variance estimation, as well as infinitesimal cross-moments, this paper documents that a sizeable proportion of discontinuous changes in asset prices are associated with strongly anti-correlated, contemporaneous changes in volatility. Not only are the price jump sizes strongly negatively correlated with the volatility jump sizes, but the absolute values of their (negative) mean and dispersion appear to increase with the volatility level, an additional effect which should lead to care in the management of joint directional and volatility jump risk. Using a possibly non-monotonic pricing kernel, we illustrate the equilibrium impact of price and volatility co-jumps on both return and variance risk premia.

Download or read book Statistical Methods in Finance written by G. S. Maddala and published by . This book was released on 1996-12-11 with total page 760 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive reference work for teaching at graduate level and research in empirical finance. The chapters cover a wide range of statistical and probabilistic methods applied to a variety of financial methods and are written by internationally renowned experts.

Download or read book Disentangling Volatility from Jumps written by Yacine Ait-Sahalia and published by . This book was released on 2010 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Realistic models for financial asset prices used in portfolio choice, option pricing or risk management include both a continuous Brownian and a jump components. This paper studies our ability to distinguish one from the other. I find that, surprisingly, it is possible to perfectly disentangle Brownian noise from jumps. This is true even if, unlike the usual Poisson jumps, the jump process exhibits an infinite number of small jumps in any finite time interval, which ought to be harder to distinguish from Brownian noise, itself made up of many small moves.

Download or read book Numerical Analysis Of Stochastic Volatility Jump Diffusion Models written by Abdelilah Jraifi and published by LAP Lambert Academic Publishing. This book was released on 2014-06-30 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the modern economic world, the options contracts are used because they allow to hedge against the vagaries and risks refers to fluctuations in the prices of the underlying assets. The determination of the price of these contracts is of great importance for investors.We are interested in problems of options pricing, actually the European and Quanto options on a financial asset. The price of that asset is modeled by a multi-dimentional jump diffusion with stochastic volatility. Otherwise, the first model considers the volatility as a continuous process and the second model considers it as a jump process. Finally in the 3rd model, the underlying asset is without jump and volatility follows a model CEV without jump. This model allow better to take into account some phenomena observed in the markets. We develop numerical methods that determine the values of prices for these options. We first write the model as an integro-differential stochastic equations system "EIDS," of which we study existence and unicity of solutions. Then we relate the resolution of PIDE to the computation of the option value.

Download or read book A Guide to IMF Stress Testing written by Ms.Li L Ong and published by International Monetary Fund. This book was released on 2014-12-23 with total page 610 pages. Available in PDF, EPUB and Kindle. Book excerpt: The IMF has had extensive involvement in the stress testing of financial systems in its member countries. This book presents the methods and models that have been developed by IMF staff over the years and that can be applied to the gamut of financial systems. An added resource for readers is the companion CD-Rom, which makes available the toolkit with some of the models presented in the book (also located at elibrary.imf.org/page/stress-test-toolkit).

Download or read book Taming the Skew written by Sanjiv Ranjan Das and published by . This book was released on 1997 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is widely acknowledged that many financial markets exhibit a considerably greater degree of kurtosis (and sometimes also skewness) than is consistent with the Geometric Brownian Motion model of Black and Scholes (1973). Among the many alternative models that have been proposed in this context, two have become especially popular in recent years: models of jump-diffusions, and models of stochastic volatility. This paper explores the statistical properties of these models with a view to identifying simple criteria for judging the consistency of either model with data from a given market; our specific focus is on the patterns of skewness and kurtosis that arise in each case as the length of the interval of observations changes. We find that, regardless of the precise parameterization employed, these patterns are strikingly similar within each class of models, enabling a simple consistency test along the desired lines. As an added bonus, we find that for most parameterizations, the set of possible patterns differs sharply across the two models, so that data from a given market will typically not be consistent with both models. However, there exist exceptional parameter configurations under which skewness and kurtosis in the two models exhibit remarkably similar behavior from a qualitative standpoint. The results herein will be useful to empiricists, theorists and practitioners looking for parsimonious models of asset prices

Download or read book Jumps Realized Volatility and Value at risk written by Shuai Yang and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three research topics, which together study the related topics of volatility jumps, modeling volatility and forecasting Value-at-Risk (VaR). The first topic focuses on volatility jumps based on two recently developed jumps detection methods and empirically studied six markets and the distributional features, size and intensity of jumps and cojumps. The results indicate that foreign exchange markets have higher jump intensities, while equity markets have a larger jump size. I find that index and stock markets have more interdependent cojumps across markets. I also find two recently proposed jump detection methods deliver contradictory results of jump and cojump properties. The jump detection technique based on realized outlyingness weighted variation (ROWV) delivers higher jump intensities in foreign exchange markets, whereas the bi-power variation (BV) method produces higher jump intensities in equity markets. Moreover, jumps under the ROWV method display more serial correlations than the BV method. The ROWV method detects more cojumps and higher cojumps intensities than the BV method does, particularly in foreign exchange markets. In the second topic, the Model Confidence Set test (MCS) is used. MCS selects superior models by power in forecasting ability. The candidate models set included 9 GARCH type models and 8 realized volatility models. The dataset is based on six markets sparming more than 10 years, avoiding the so- called data snooping problem. The dataset is extended by including recent financial crisis periods. The dc.description.abstract advantage of the MCS test is that it can compare models in a group, not only in a pair. Two loss functions that are robust to noise in volatility proxy were also implemented and the empirical results indicated that the traditional GARCH models were outperformed by realized volatility models when using intraday data. The MCS test based on MSE selected asymmetric ARFlMA models and the HAR mode as the most predictive, while the asymmetric QLike loss function revealed the leveraged HAR and leveraged HAR-CJ model based on bi-power variation as the highest performers. Moreover, results from the subsamples indicate that the asymmetric ARFIMA model performs best over turbulent periods. The third topic focuses on evaluating a broad band ofVaR forecasts. Different VaR models were compared across six markets, five volatility models, four distributions and 8 quantiles, resulting in 960 specifications. The MCS test based on regulatory favored asymmetric loss function was applied and the empirical results indicate that the proposed asymmetric ARFIMA and leveraged HAR models, coupled with generalized extreme value distribution (GEV) or generalized Pareto distribution (GPD), have the superior predictive ability on both long and short positions. The filtered extreme value methods were found to handle not only extreme quantiles but also regular ones. The analysis conducted in this thesis is intended to aid risk management, and subsequently reduce the probability of financial distress in the sector.