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The Term Structure Of Volatility Predictability
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Book Synopsis The Term Structure of Volatility Predictability by : Xingyi Li
Download or read book The Term Structure of Volatility Predictability written by Xingyi Li and published by . This book was released on 2019 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volatility forecasting is crucial for portfolio management, risk management, and pricing of derivative securities. Still, little is known about the accuracy of volatility forecasts and the horizon of volatility predictability. This paper aims to fill these gaps in the literature. We begin this paper by introducing the notions of the spot and forward predicted volatilities and propose to describe the term structure of volatility predictability by the spot and forward forecast accuracy curves. Then we perform a comprehensive study on the term structure of volatility predictability in the stock and foreign exchange markets. Our results quantify the volatility forecast accuracy across horizons in the two major markets and suggest that the horizon of volatility predictability is significantly longer than that reported in the earlier studies. Nevertheless, the horizon of volatility predictability is found to be much shorter than the longest maturity of traded derivative contracts.
Book Synopsis The Limits to Volatility Predictability by : Valeriy Zakamulin
Download or read book The Limits to Volatility Predictability written by Valeriy Zakamulin and published by . This book was released on 2018 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volatility forecasting is crucial for portfolio management, risk management, and pricing of derivative securities. Still, little is known about how far ahead one can forecast volatility. First, in this paper we introduce the notions of the spot and forward predicted volatilities and propose to describe the term structure of volatility predictability by the spot and forward forecast accuracy curves. Then, by employing a few popular time-series volatility models, we perform a comprehensive empirical study on the horizon of volatility predictability. Our results suggest that, whereas the spot volatility can be predicted over horizons that extend to 35 weeks, the horizon of the forward volatility predictability is rather short and limited to approximately 7.5 weeks. Finally, we suggest a plausible explanation for why standard models fail to provide sensible longer-horizon volatility forecasts.
Book Synopsis Forecasting the Term Structure of Implied Volatilities by : Biao Guo
Download or read book Forecasting the Term Structure of Implied Volatilities written by Biao Guo and published by . This book was released on 2015 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: Neumann and Skiadopoulos (2013) document that although the implied volatilities are predictable, their economic profits become insignificant once the cost is accounted for. We show that the trading strategies based on the predictability of implied volatilities could generate significant risk-adjusted returns after controlling for the transaction cost. The implied volatility curve information is useful for the out-of-sample forecast of implied volatilities up to one week. Short-maturity implied volatilities tend to be more predictable than longmaturity implied volatilities. Although the long-maturity options are much less traded than the short-maturity options, their implied volatilities provide much more information on the price discovery.
Book Synopsis Implied Volatility Term Structure and Exchange Rate Predictability by : José Renato Haas Ornelas
Download or read book Implied Volatility Term Structure and Exchange Rate Predictability written by José Renato Haas Ornelas and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Term Structure Forecasts of Volatility and Option Portfolio Returns by : Jim Campasano
Download or read book Term Structure Forecasts of Volatility and Option Portfolio Returns written by Jim Campasano and published by . This book was released on 2018 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: I examine the predictability of equity implied volatility from the term structure, and find that forward volatility levels are biased predictors of future spot implied volatility. I construct options structures which proxy for forward volatility assets, and show that a long-short portfolio of forward volatility assets produce significantly profitable returns. As the construction of the trade is borne from a violation of an expectations hypothesis, the strategy is similar to the carry trade effected in foreign exchange and other assets. Unlike the returns to carry in foreign exchange and other assets, the forward volatility assets are not exposed to liquidity or volatility risks and negatively loads on market risk.
Book Synopsis The U.S. Term Structure and Return Volatility in Emerging Stock Markets by : Riza Demirer
Download or read book The U.S. Term Structure and Return Volatility in Emerging Stock Markets written by Riza Demirer and published by . This book was released on 2019 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the predictive power of the U.S. term structure over return volatility in emerging stock markets. Decomposing the term structure of U.S. Treasury yields into two components, the expectations factor and the maturity premium, we show that the U.S. term structure indeed contains predictive information over emerging stock market volatility, even after controlling for country specific factors including turnover and market size. While we observe heterogeneous patterns across emerging markets in terms of their predictability with respect to the U.S. term structure, we find that the market's expectation of future short term rates, implied by the expectations factor, serves as a stronger predictor of stock market volatility compared to the maturity premium component of the yield spread. We also find that the U.S. term structure has gained further predictive value following the global financial crisis, particularly for the BRICS nations of China, Russia, and S. Africa. Overall, our findings suggest that policymakers and investors can utilize interest rate signals from the U.S. Treasury yields to make projections over stock market volatility in their local markets, however, distinguishing between the two components of the yield curve could provide additional forecasting power depending on the country of focus.
Book Synopsis Forecasting the Term Structure of Volatility of Crude Oil Price Changes by : Ercan Balaban
Download or read book Forecasting the Term Structure of Volatility of Crude Oil Price Changes written by Ercan Balaban and published by . This book was released on 2017 with total page 3 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a pioneering effort to test the comparative performance of two competing models for out-of-sample forecasting the term structure of volatility of crude oil price changes employing both symmetric and asymmetric evaluation criteria. Under symmetric error statistics, our empirical model using the estimated growth factor of volatility through time is overall superior, and it beats in most cases the benchmark model of the square-root-of-time for holding periods between one and 250 days. Under asymmetric error statistics, if over-prediction (under-prediction) of volatility is undesirable, the empirical (benchmark) model is consistently superior. Relative performance of the empirical model is much higher for holding periods up to fifty days.
Book Synopsis Term Structure of Variance Risk Premium and Returns' Predictability by : Giacomo Bormetti
Download or read book Term Structure of Variance Risk Premium and Returns' Predictability written by Giacomo Bormetti and published by . This book was released on 2016 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: We derive an analytic relation between equity risk premium and the term structure of variance risk premium (VRP). Motivated by this result, we estimate the VRP term structure using a general and fully analytical discrete-time option pricing framework featuring multiple volatility components and multiple risk premia. We confirm the importance of VRP in improving option pricing performances and show the ability of multi-component GARCH models to produce realistic hump-shaped VRP term structure. We finally uncover the strong predictive power of the shape of the VRP term structure, summarized by its slope, on future stock-index returns.
Book Synopsis The Implied Volatility Term Structure of Stock Index Options by : Scott Mixon
Download or read book The Implied Volatility Term Structure of Stock Index Options written by Scott Mixon and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper tests the expectations hypothesis of the term structure of implied volatility for several national stock market indices (Samp;P 500, FTSE 100, DAX, CAC, and Nikkei 225). The tests indicate that the slope of at-the-money implied volatility over different maturities has predictive ability for future short dated implied volatility, although not to the extent predicted by the expectations hypothesis. Equivalently, the forward implied volatility is a biased forecast of future implied volatility. The low forecast power may be due to a failure to control for a risk premium in the prices of options. Evidence is presented that a time varying risk premium that increases in volatility is consistent with the results. Including a volatility risk proxy in the specification improves the forecasting ability beyond that embedded in the implied volatility term structure.
Book Synopsis Nonlinear Time Series Analysis by : Ruey S. Tsay
Download or read book Nonlinear Time Series Analysis written by Ruey S. Tsay and published by John Wiley & Sons. This book was released on 2018-09-14 with total page 466 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive resource that draws a balance between theory and applications of nonlinear time series analysis Nonlinear Time Series Analysis offers an important guide to both parametric and nonparametric methods, nonlinear state-space models, and Bayesian as well as classical approaches to nonlinear time series analysis. The authors—noted experts in the field—explore the advantages and limitations of the nonlinear models and methods and review the improvements upon linear time series models. The need for this book is based on the recent developments in nonlinear time series analysis, statistical learning, dynamic systems and advanced computational methods. Parametric and nonparametric methods and nonlinear and non-Gaussian state space models provide a much wider range of tools for time series analysis. In addition, advances in computing and data collection have made available large data sets and high-frequency data. These new data make it not only feasible, but also necessary to take into consideration the nonlinearity embedded in most real-world time series. This vital guide: • Offers research developed by leading scholars of time series analysis • Presents R commands making it possible to reproduce all the analyses included in the text • Contains real-world examples throughout the book • Recommends exercises to test understanding of material presented • Includes an instructor solutions manual and companion website Written for students, researchers, and practitioners who are interested in exploring nonlinearity in time series, Nonlinear Time Series Analysis offers a comprehensive text that explores the advantages and limitations of the nonlinear models and methods and demonstrates the improvements upon linear time series models.
Book Synopsis Stock Market Fluctuations and the Term Structure by : Chunsheng Zhou
Download or read book Stock Market Fluctuations and the Term Structure written by Chunsheng Zhou and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses the term structure of interest rates to explain the variations of stock prices and stock returns. It shows that interest rates have an important impact on stock returns, especially at long horizons. The hypothesis that expected stock returns move one-for-one with ex ante interest rates, which has been rejected strongly in other studies using short horizon data, is supported by long horizon data. The paper proposes, for the first time, a single measure--the present value of forward interest rates--to summarize the information of the term structure that is useful in characterizing the comovements of the equity market and the bond market, and finds that such a single measure explains a significant part of variation in dividend-price ratios. The paper also suggests that the high volatility of the stock market is related to the high volatility of long-term bond yields and may be accounted for by changing forecasts of discount rates. The findings of this paper are quite different from the typical findings of the previous work and may provide a reasonable economic explanation for the predictability of long-horizon stock returns.
Book Synopsis Term Structure Forecasting Using Macro Factors and Forecast Combination by : Michiel De Pooter
Download or read book Term Structure Forecasting Using Macro Factors and Forecast Combination written by Michiel De Pooter and published by . This book was released on 2010 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Variance Risk Premium by : Junye Li
Download or read book The Variance Risk Premium written by Junye Li and published by . This book was released on 2016 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the properties of the variance risk premium (VRP). We propose a flexible asset pricing model that captures co-jumps in prices and volatility, and self-exciting jump clustering. We estimate the model on equity returns and variance swap rates at different horizons. The total VRP is negative and has a downward-sloping term structure, while its jump component displays an upward-sloping term structure. The abrupt and persistent response of the short-term jump VRP to extreme events makes this specific premium a proxy for investors' fear of a market crash. Furthermore, the use of the VRP level and slope, and of its components, helps improve the short-run predictability of equity excess returns.
Book Synopsis Volatility Surface and Term Structure by : Kin Keung Lai
Download or read book Volatility Surface and Term Structure written by Kin Keung Lai and published by Routledge. This book was released on 2013-09-11 with total page 113 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.
Book Synopsis Option Markets, Return Predictability and Term Structure by : Yanhui Zhao
Download or read book Option Markets, Return Predictability and Term Structure written by Yanhui Zhao and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on eliciting information about underlying assets from the equity options markets, and improving our understanding of the term structure cost of equity. In the first essay, we find that high standard deviations of the volatility premium, of implied volatility innovations, and of the volatility term structure spread in equity options predict low underlying returns. This return predictability is not explained by the levels of these three variables, or by volatility of volatility, other known firm characteristics, or common risk factor models. We find support for interpreting the standard deviations of these option-based measures as forward-looking proxies of heterogeneous beliefs. In the second essay, we find that stocks with high risk-neutral skewness (RNS) exhibit abnormal performance driven by rebounds following poor performance. This behavior connects it to momentum crashes caused by reversal in past losers. In periods of post-recession rebounds and high market volatility when momentum crashes occur, a zero-investment high-low RNS portfolio has significant positive abnormal returns. The momentum anomaly is strongest (weakest) in stocks with the lowest (highest) RNS, consistent with the positive relationship of RNS to momentum crashes. These results hold controlling for trading frictions, other firm characteristics, and risk factors. We generalize our findings to all stocks by constructing an RNS factor-mimicking portfolio SKEW and find that a WML strategy that avoids high SKEW beta stocks has superior performance to the baseline and risk-managed WML strategies. In the third essay, we estimate the cost of equity capital term structure for the insurance industry as a whole, and several insurance sectors such as life/health and property/casualty. We use a vector autoregressive process to jointly model the dynamics of expected cash flows, beta, and the market risk premium. We obtain a closed form solution for the discount rate appropriate for each maturity. Our empirical analysis shows that for the insurance industry, the cost of equity based on our term structure model is on average nearly 299.6 basis points higher compared to the single period CAPM. This means that these insurers might overly invest if they rely on the single period CAPM.
Book Synopsis Forecasting Volatility in the Financial Markets by : Stephen Satchell
Download or read book Forecasting Volatility in the Financial Markets written by Stephen Satchell and published by Elsevier. This book was released on 2011-02-24 with total page 428 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forecasting Volatility in the Financial Markets, Third Edition assumes that the reader has a firm grounding in the key principles and methods of understanding volatility measurement and builds on that knowledge to detail cutting-edge modelling and forecasting techniques. It provides a survey of ways to measure risk and define the different models of volatility and return. Editors John Knight and Stephen Satchell have brought together an impressive array of contributors who present research from their area of specialization related to volatility forecasting. Readers with an understanding of volatility measures and risk management strategies will benefit from this collection of up-to-date chapters on the latest techniques in forecasting volatility. Chapters new to this third edition:* What good is a volatility model? Engle and Patton* Applications for portfolio variety Dan diBartolomeo* A comparison of the properties of realized variance for the FTSE 100 and FTSE 250 equity indices Rob Cornish* Volatility modeling and forecasting in finance Xiao and Aydemir* An investigation of the relative performance of GARCH models versus simple rules in forecasting volatility Thomas A. Silvey Leading thinkers present newest research on volatility forecasting International authors cover a broad array of subjects related to volatility forecasting Assumes basic knowledge of volatility, financial mathematics, and modelling
Book Synopsis Modelling and forecasting stock return volatility and the term structure of interest rates by : Michiel de Pooter
Download or read book Modelling and forecasting stock return volatility and the term structure of interest rates written by Michiel de Pooter and published by Rozenberg Publishers. This book was released on 2007 with total page 286 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of a collection of studies on two areas in quantitative finance: asset return volatility and the term structure of interest rates. The first part of this dissertation offers contributions to the literature on how to test for sudden changes in unconditional volatility, on modelling realized volatility and on the choice of optimal sampling frequencies for intraday returns. The emphasis in the second part of this dissertation is on the term structure of interest rates.
