Showing 1 - 10 of 189
Principal component analysis of equity options on Dow-Jones firms reveals a strong factor structure. The first principal component explains 77% of the variation in the equity volatility level, 77% of the variation in the equity option skew, and 60% of the implied volatility term structure across...
Persistent link: https://www.econbiz.de/10010851218
We develop a continuous-time intertemporal CAPM model that allows for risky beta exposure, which we explicitly specify. In the model, the expected return on a stock depends on beta's co-movement with market variance and more generally with the stochastic discount factor and deviates from the...
Persistent link: https://www.econbiz.de/10012899147
Value-at-Risk (VaR) has emerged as the standard tool for measuring and reporting financial market risk. Currently, more than eighty commercial vendors offer enterprise or trading risk management systems which report VaR-like measures. Risk managers are therefore often left with the daunting task...
Persistent link: https://www.econbiz.de/10005100810
We provide a novel daily decomposition of the real exchange rate that exploits a direct link between bond and foreign exchange (FX) markets. Real exchange rate dynamics can be attributed to changes in the expected future level of the exchange rate; cross-country differentials of expected...
Persistent link: https://www.econbiz.de/10013430324
Expected returns vary when investors face time-varying investment opportunities. Longrun risk models (Bansal and Yaron 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton 2000) emphasize sources of risk that are not observable to the econometrician. We show that, for both classes of...
Persistent link: https://www.econbiz.de/10010319622
We provide a decomposition of nominal yields into real yields, expectations of future inflation and inflation risk premiums when real bonds or inflation swaps are unavailable or unreliable due to their relative illiquidity. We combine nominal yields with surveys of inflation forecasts within a...
Persistent link: https://www.econbiz.de/10010319651
We introduce generalized autoregressive gamma (GARG) processes, a class of autoregressive and moving-average processes that extends the class of existing autoregressive gamma (ARG) processes in one important dimension: each conditional moment dynamic is driven by a different and identifiable...
Persistent link: https://www.econbiz.de/10014544560
This paper addresses an existing gap in the developing literature on conditional skewness. We develop a simple procedure to evaluate parametric conditional skewness models. This procedure is based on regressing the realized skewness measures on model-implied conditional skewness values. We find...
Persistent link: https://www.econbiz.de/10010335677
Cochrane and Piazzesi (2005) show that (i) lagged forward rates improve the predictability of annual bond returns, adding to current forward rates, and that (ii) a Markovian model for monthly forward rates cannot generate the pattern of predictability in annual returns. These results stand as a...
Persistent link: https://www.econbiz.de/10010420647
Plain vanilla options have a single underlying asset and a single condition on the payoff at the expiration date. For this class of options, a well-known result of Duffie, Pan and Singleton (2000) shows how to invert the characteristic function to obtain a closed-form formula for their prices....
Persistent link: https://www.econbiz.de/10011396690