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Volatility Structures (volatility + structure)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

On the Existence of Finite-Dimensional Realizations for Nonlinear Forward Rate Models

MATHEMATICAL FINANCE, Issue 2 2001
Tomas Björk
We consider interest rate models of the Heath,Jarrow,Morton type, where the forward rates are driven by a multidimensional Wiener process, and where the volatility is allowed to be an arbitrary smooth functional of the present forward rate curve. Using ideas from differential geometry as well as from systems and control theory, we investigate when the forward rate process can be realized by a finite-dimensional Markovian state space model, and we give general necessary and sufficient conditions, in terms of the volatility structure, for the existence of a finite-dimensional realization. A number of concrete applications are given, and all previously known realization results (as far as existence is concerned) for Wiener driven models are included and extended. As a special case we give a general and easily applicable necessary and sufficient condition for when the induced short rate is a Markov process. In particular we give a short proof of a result by Jeffrey showing that the only forward rate models with short rate dependent volatility structures which generically possess a short rate realization are the affine ones. These models are thus the only generic short rate models from a forward rate point of view. [source]

Price Common Volatility or Volume Common Volatility?

ASIAN ECONOMIC JOURNAL, Issue 2 2004
Evidence from Taiwan's Exchange Rate, Stock Markets
This paper investigates the common volatility structure of stock and exchange rate markets of Taiwan. The two markets are often linked together and we are interested in knowing whether price or volume is a good proxy to pursue this issue. We claim that Taiwanese government interventions distort the timing of conventional price volatility clustering in the two markets. The unrestricted trading volumes reveal more information regarding the market than price. We find that common volatility does exist in the stock and exchange markets and this fact is uncovered more easily by using trading volume than by using prices. [source]

Information and volatility links in the foreign exchange market

ACCOUNTING & FINANCE, Issue 2 2009
Sirimon Treepongkaruna
G12; G14 Abstract We apply the trading model of Fleming et al (1998). to a number of currency markets. The model posits that two markets can have common volatility structures as a result of receiving common information and from cross-hedging activity where a position in one currency is used to hedge risk in a position taken in another. Our results imply that the model is effective in identifying common information flows and volatility spillovers in the currency markets and that some of these effects are lost when simply examining raw correlations. A series of specification tests of the 21 bivariate systems that are examined provides support for the trading model in the foreign exchange context. [source]

On the Existence of Finite-Dimensional Realizations for Nonlinear Forward Rate Models

MATHEMATICAL FINANCE, Issue 2 2001
Tomas Björk
We consider interest rate models of the Heath,Jarrow,Morton type, where the forward rates are driven by a multidimensional Wiener process, and where the volatility is allowed to be an arbitrary smooth functional of the present forward rate curve. Using ideas from differential geometry as well as from systems and control theory, we investigate when the forward rate process can be realized by a finite-dimensional Markovian state space model, and we give general necessary and sufficient conditions, in terms of the volatility structure, for the existence of a finite-dimensional realization. A number of concrete applications are given, and all previously known realization results (as far as existence is concerned) for Wiener driven models are included and extended. As a special case we give a general and easily applicable necessary and sufficient condition for when the induced short rate is a Markov process. In particular we give a short proof of a result by Jeffrey showing that the only forward rate models with short rate dependent volatility structures which generically possess a short rate realization are the affine ones. These models are thus the only generic short rate models from a forward rate point of view. [source]

EXTENSIONS OF THE STANDARDIZED CROSS-SECTIONAL APPROACH TO SHORT-HORIZON EVENT STUDIES

THE JOURNAL OF FINANCIAL RESEARCH, Issue 4 2007
Ronald Bremer
Abstract Strong evidence indicates that short-horizon event-induced abnormal returns and volatility vary significantly over event days. Event-study methods that assume constant event-induced abnormal returns and volatility over event days have potentially inflated Type I error rates and poor test power. Our simple extensions of the Boehmer, Musumeci, and Poulsen (1991) approach scale abnormal returns with conditional variance, which is estimated with GARCH(1,1) and an indicator of the event in a two-stage estimation. Our method improves the Boehmer, Musumeci, and Poulsen approach on model specification and test power, even under challenging event-induced mean and volatility structures, and could standardize short-horizon event studies. [source]

Consistent calibration of HJM models to cap implied volatilities

THE JOURNAL OF FUTURES MARKETS, Issue 11 2005
Flavio Angelini
This article proposes a calibration algorithm that fits multifactor Gaussian models to the implied volatilities of caps with the use of the respective minimal consistent family to infer the forward-rate curve. The algorithm is applied to three forward-rate volatility structures and their combination to form two-factor models. The efficiency of the consistent calibration is evaluated through comparisons with nonconsistent methods. The selection of the number of factors and of the volatility functions is supported by a principal-component analysis. Models are evaluated in terms of in-sample and out-of-sample data fitting as well as stability of parameter estimates. The results are analyzed mainly by focusing on the capability of fitting the market-implied volatility curve and, in particular, reproducing its characteristic humped shape. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1093,1120, 2005 [source]