Abstract The main purpose of this paper is to examine empirically the time series properties of the French Market Volatility Index (VX1). We also examine the VX1's ability to forecast future realized market volatility and finds a strong relationship. More importantly, we show how the index can be used to generate volatility forecasts over different horizons and that these forecasts are reasonably accurate predictors of future realized volatility. JEL classification codes: G14, C53, C13.
Edwin J. Elton, Martin J. Gruber, Christopher R. Blake; Common Factors in Active and Passive Portfolios, European Finance Review, Volume 3, Issue 1, 1 Janu
Abstract Value-at-risk methods which employ a linear (“delta only”) approximation to the relation between instrument values and the underlying risk factors are unlikely to be robust when applied to portfolios containing non-linear contracts such as options. The most widely used alternative to the delta-only approach involves revaluing each contract for a large number of simulated values of the underlying factors. In this paper we explore an alternative approach which uses a quadratic approximation to the relation between asset values and the risk factors. This method (i) is likely to be better adapted than the linear method to the problem of assessing risk in portfolios containing non-linear assets, (ii) is less computationally intensive than simulation using full-revaluation and (iii) in common with the delta-only method, operates at the level of portfolio characteristics (deltas and gammas) rather than individual instruments.
Abstract The privatization process through which governments transfer their holdings vary from one country to another. The coupon (or voucher) privatization process, which has been frequently utilized in Eastern Europe, is generally characterized by a transfer of government holdings to the public for less than their full economic value. The vouchers process in the Czech Republic, specifically, is a case in which the transfer was practically free and in which foreign participation was banned. As such, and in the absence of an actual flow of funds, the process constituted an interesting large-scale experiment of a price discovery mechanism whose empirical conclusions are inconclusive. On the one hand, the variance of the expected outcomes declines during this process, but on the other hand, the participants could obtain superior outcomes using public information, while some, who had access to private information, may performed even better. Thus, wondering whether the process in the Czech Republic served as an efficient price discovery mechanism, additional potential distortions should be investigated: (i) the specific rules of the process through which the public exchanged bidding points for shares, or (ii) the role that funds' managers played, in lieu of the potential conflict between their objective functions and those of the shareholders of these funds, and (iii) lack of uniformity in information reporting standards. Generally, a failure to discover prices may lead to inefficiency in capital markets, because of the potential distortion of relative prices. If, in fact, the process in the Czech Republic, during the ‘second wave’, in which most of the shares of over 800 companies were transferred to the private sector, did not serve as an immediate price discovery mechanism, the ‘damage’, if any, was probably not significant, since it was not associated with a massive reallocation of funds, and the market could eventually correct itself once real funds started to pour in, in reaction to post-process relative prices.
Abstract In January 1999, the European monetary union (EMU) was formally launched with 11 member countries. However, before May 1998 there was considerable uncertainty about who would join EMU, and whether the project would start on time. When a monetary union is formed, exchange rates between the member countries are irrevocably fixed, and yield spreads stemming from exchange-rate risk are eliminated. As a direct consequence, EMU affected the prices of long-term bonds well before 1999, but quantifying this effect can be difficult when there is uncertainty about the monetary union. We address these issues and develop a bond-pricing model which explicitly takes into account that a country may join a monetary union at a future, unspecified date. The empirical results show that a narrow EMU, consisting of Germany, France and the Benelux countries, has been priced with almost 100% probability throughout the period 1995—1998, whereas, on average, the implied probability of joining EMU has been somewhat lower for the other EU countries. However, in the period leading up to May 1998, the estimated probabilities have increased considerably for the countries that joined EMU in January 1999. JEL classification codes: G12, G13, F36.
The option pricing model has been the work horse in the development of financial economics ever since the seminal papers by Black and Scholes (1973) and Merton (1973). Here, the arbitrage free prices of equity options were derived in closed form. Apart from the price of the underlying asset and contractual terms (strike
The paper analyzes the role of agency driven takeover activity. The analysis shows that takeovers can play an important role in reducing agency costs even though the gains from the corporate restructuring that follows the takeovers are zero, which counters existing models of agency driven takeover activity. The model can therefore form the basis for deriving empirical predictions which discriminate between the "agency paradigm" and the "corporate restructuring paradigm" of takeover activity. Negative post-merger performance
Richard A. Brealey, Ian A. Cooper, Evi Kaplanis; What is the International Dimension of International Finance?, European Finance Review, Volume 3, Issue 1,
Abstract An important determinant of option prices is the elasticity of the pricing kernel used to price all claims in the economy. In this paper, we first show that for a given forward price of the underlying asset, option prices are higher when the elasticity of the pricing kernel is declining than when it is constant. We then investigate the implications of the elasticity of the pricing kernel for the stochastic process followed by the underlying asset. Given that the underlying information process follows a geometric Brownian motion, we demonstrate that constant elasticity of the pricing kernel is equivalent to a Brownian motion for the forward price of the underlying asset, so that the Black–Scholes formula correctly prices options on the asset. In contrast, declining elasticity implies that the forward price process is no longer a Brownian motion: it has higher volatility and exhibits autocorrelation. In this case, the Black–Scholes formula underprices all options.
Abstract This note discusses stochastic discount factor (SDF) measures of mutual fund performance. It shows that the most common SDF performance measures can be interpreted as Jensen's “alphas”. JEL Classification Numbers: G11, G12, G23