Cross hedging with single stock futures
Reference: 2004-16v2Authors: Chris Brooks, Ryan Davies, Sang Soo Kim
Abstract: This study evaluates the efficiency of cross hedging with the new single stock futures (SSF) contracts recently introduced in the United States. We use matched sample estimation techniques to select SSF contracts that will reduce the basis risk of crossing hedging and will yield the most efficient hedging portfolio. Employing multivariate matching techniques with cross-sectional matching characteristics, we canContinue reading
Pricing Convertible Bonds by Simulation
Reference: 2004-15Authors: Dmitri Lvov, Ali Bora Yigitbasioglu, Naoufel El Bachir
Abstract: Convertible bonds are complex hybrid securities subject to multiple sources of risk. Many exhibit exotic path dependent features. Monte Carlo simulation methods are usually the favorite choice for solving high-dimensional problems and pricing path dependent securities. This paper breaks away from the tradition established in the literature of pricing convertible bonds with finite difference and lattice methods, and suggestsContinue reading
The Equity Index Skew, Market Crashes and Asymmetric Normal Mixture GARCH
Reference: 2004-14Authors: Carol Alexander, Emese Lazar
Abstract: The skewness in physical distributions of equity index returns and the implied volatility skew in the risk-neutral measure are subjects of extensive academic research. Much attention is now being focused on models that are able to capture time-varying conditional skewness and kurtosis. For this reason normal mixture GARCH(1,1) models have become very popular in financial econometrics. We introduce furtherContinue reading
Ex Ante Versus Ex Post Regulation of Bank Capital
Reference: 2004-13Authors: Arup Daripa, Simone Varotto
Abstract: The current debate on the new Basel Accord gives rise to a natural question about the appropriate form of capital regulation. We construct a general framework to study this issue. We show that ex ante regulation wastes the expertise of a bank in measuring its risk exposure, while an ex post regime makes full use of it. However, theContinue reading
The Effectiveness of Britain’s Financial Service Authority: An Economic Analysis
Reference: 2004-12Authors: Colin Beardsley, John O'Brien
Abstract: Sweeping regulatory reforms in Britain resulted in the formation of the Financial Services Authority (FSA). Because greater transparency of information is a major objective for this Act, shifting from one information system to another has re-distributive effects. We identify these effects at a sector level and their drivers at the firm level. At a sector level, FSA has generallyContinue reading
Hedging with Stochastic and Local Volatility
Reference: 2004-11Authors: Carol Alexander, Leonardo M. Nogueira
Abstract: We derive the local volatility hedge ratios that are consistent with a stochastic instantaneous volatility and show that this ‘stochastic local volatility’ model is equivalent to the market model for implied volatilities. We also show that a common feature of all Markovian single factor stochastic volatility models, (log)normal mixture option pricing models and ‘sticky delta’ models is that theyContinue reading
The Continuous Limit of GARCH Processes
Reference: 2004-10Authors: Carol Alexander, Emese Lazar
Abstract: Contrary to popular belief, the diffusion limit of a GARCH variance process is not a diffusion model unless one makes a very specific assumption that cannot be generalized. In fact, the normal GARCH(1,1) prices of European call and puts are identical to the Black-Scholes prices based on the average of a deterministic variance process. In the case of GARCHContinue reading
FRS17 and the Sterling Double A Corporate Yield Curve
Reference: 2004-09Authors: Frank S. Skinner, Michalis Ioannides
Abstract: The skewness in physical distributions of equity index returns and the implied volatility skew in the risk-neutral measure are subjects of extensive academic research. Much attention is now being focused on models that are able to capture time-varying conditional skewness and kurtosis. For this reason normal mixture GARCH(1,1) models have become very popular in financial econometrics. We introduce furtherContinue reading
An Uncertain Volatility Explanation for Delayed Calls of Convertible Bonds
Reference: 2004-08Authors: Ali Bora Yigitbasioglu, Carol Alexander
Abstract: Arbitrage-free price bounds for convertible bonds are obtained assuming a stochastic volatility process for the common stock that lies within a band but makes few other assumptions about volatility dynamics. Equity-linked hazard rates, stochastic interest rates and different assumptions about default and recovery behavior are accommodated within this approach. A non-linear multi-factor reduced-form equity-linked default model leads to aContinue reading
MTS Time Series: Market and Data Description for the European Bond and Repo Database
Reference: 2004-07Authors: Alfonso Dufour, Frank Skinner
Abstract: MTS Time Series: Market and Data Description for the European Bond and Repo Database Alfonso Dufour and Frank Skinner MTS Time Series is a new source of high frequency and daily data for European fixed income markets. For the first time academic researchers and market practitioners have available a wealth of trading data for a large number of EuropeanContinue reading
Normal Mixture GARCH(1,1): Application to Exchange Rate Modelling
Reference: 2004-06Authors: Carol Alexander, Emese Lazar
Abstract: Some recent specifications for GARCH error processes explicitly assume a conditional variance that is generated by a mixture of normal components, albeit with some parameter restrictions. This paper analyses the general normal mixture GARCH(1,1) model which can capture time-variation in both conditional skewness and kurtosis. A main focus of the paper is to provide conclusive evidence that, for modellingContinue reading
Gambling on the S & P 500′s “Gold Seal”: New evidence on the Index Effect
Reference: 2004-05Authors: Chris Brooks, Konstantina Kappou, Charles Ward
Abstract: This study examines the abnormal returns, trading activity and long term performance of stocks that were added to the S&P 500 Index during the period 1990 to 2002. By using a three-factor pricing model that allows for firm size and value characteristics as well as market risk, we are able to shed new light on the widely observed ‘indexContinue reading
A Comparison of Cointegration & Tracking Error Models for Mutual Funds & Hedge Funds
Reference: 2004-04Authors: Carol Alexander, Anca Dimitriu
Abstract: We present a detailed study of portfolio optimisation based on cointegration, a statistical tool that here exploits a long-run equilibrium relationship between stock prices and an index price. We compare the theoretical and empirical properties of cointegration optimal equity portfolios with those of portfolios optimised on the tracking error variance. From an eleven year out of sample performance analysisContinue reading
Measuring the Impact of Regulation on Market Stability: Evidence from the US Markets
Reference: 2004-03Authors: Colin Beardsley, John O'Brien
Abstract: In this paper, we introduce a new methodology designed to test the effect of new regulatory disclosure requirements on the disclosure threshold as predicted by the extant literature (Verrecchia (1983), Dye (1985)). We apply our methodology to test the consistency between observed effects from major US regulation past and present (1933/1934 Securities Acts, Regulation Fair Disclosure 2000, and theContinue reading
The Art of investing in Hedge Funds: Fund Selection and Optimal Allocations
Reference: 2004-02Authors: Carol Alexander, Anca Dimitriu
Abstract: With institutional investors increasingly involved in alternative investments, portfolio optimisation within a large universe of hedge funds has become a key area for research. This paper develops a portfolio construction model that is specifically designed for funds of hedge funds, incorporating specific controls for operational limitations, data biases and incompleteness. Absolute performance is targeted by selecting funds according toContinue reading
