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Return Shocks (return + shock)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

Information flows and option bid/ask spreads

THE JOURNAL OF FUTURES MARKETS, Issue 12 2005
Fredrik Berchtold
This study analyzes two types of information flows in financial markets. The first type represents return information, where informed investors know whether the stock price will increase or decrease. The second type is labeled volatility information, where the direction of the stock price is unknown, but informed investors know that the stock price either will increase or decrease. Both information flows are estimated within the GARCH framework, approximated with the use of Swedish OMX stockindex and options strangle return shocks, respectively. The results show significant conditional stock-index and options strangle variance, although with notable differences. Stock-index return shocks exhibit a high level of variance persistence and an asymmetric initial impact to the variance. Option strangle shocks have a relatively low persistence level, but a higher and more symmetric initial impact. A time-series regression of call and put option bid/ask spreads is performed, relating the spreads to the information flows and other explanatory variables. The results show that call and put option bid/ask spreads are related to stock-index and options strangle return shocks, as well as the conditional stock-index variance. This is consistent with the view that market makers alter option spreads in response to return and volatility information flows, as well as the conditional stock-index variance.© 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1147,1172, 2005 [source]

Looking for contagion in currency futures markets

THE JOURNAL OF FUTURES MARKETS, Issue 10 2003
Chu-Sheng Tai
This article tests whether there are pure contagion effects in both conditional means and volatilities among British pound, Canadian dollar, Deutsche mark, and Swiss franc futures markets during the 1992 ERM crisis. A conditional version of international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) is used to control for economic fundamentals. The empirical results indicate that overall there are no mean spillovers among those futures markets, but they are detected during the crisis period. That is, past return shocks originating in any one of the four markets have no impact on the other three markets during the entire sample period, suggesting that these markets are weak-form efficient. However, this weak-form market efficiency fails to hold during the market turmoil, especially for British pound and Swiss franc, and the sources of contagion-in-mean effects are mainly due to the return shocks originating in three European currency futures markets. As for the contagion-in-volatility, it is detected for British pound only because its conditional volatility is influenced by the negative volatility shocks from Canadian dollar, Deutsche mark, and Swiss franc, with Deutsche mark playing the dominant role in generating these shocks. JEL Classifications: C32; F31; G12. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:957,988, 2003 [source]

SYMMETRIC VERSUS ASYMMETRIC CONDITIONAL COVARIANCE FORECASTS: DOES IT PAY TO SWITCH?

THE JOURNAL OF FINANCIAL RESEARCH, Issue 3 2007
Susan Thorp
Abstract Volatilities and correlations for equity markets rise more after negative returns shocks than after positive shocks. Allowing for these asymmetries in covariance forecasts decreases mean-variance portfolio risk and improves investor welfare. We compute optimal weights for international equity portfolios using predictions from asymmetric covariance forecasting models and a spectrum of expected returns. Investors who are moderately risk averse, have longer rebalancing horizons, and hold U.S. equities benefit most and may be willing to pay around 100 basis points annually to switch from symmetric to asymmetric forecasts. Accounting for asymmetry in both variances and correlations significantly lowers realized portfolio risk. [source]