We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic ...intraday event—the Flash Crash—where a large automated selling program was rapidly executed in the E-mini S&P 500 stock index futures market. Using audit trail transaction-level data for the E-mini on May 6 and the previous three days, we find that the trading pattern of the most active nondesignated intraday intermediaries (classified as High-Frequency Traders) did not change when prices fell during the Flash Crash.
While much research uses multivariate GARCH to model volatility dynamics and risk measures, one particular type of multivariate GARCH model, GO-GARCH, has been underutilized. This paper uses DCC, ...ADCC and GO-GARCH to model volatilities and conditional correlations between emerging market stock prices, oil prices, VIX, gold prices and bond prices. A rolling window analysis is used to construct out-of-sample one-step-ahead forecasts of dynamic conditional correlations and optimal hedge ratios. In most of the situations we study, oil is the best asset to hedge emerging market stock prices. Hedge ratios from the ADCC model are preferred (most effective) for hedging emerging market stock prices with oil, VIX, or bonds. Hedge ratios estimated from the GO-GARCH are most effective for hedging emerging market stock prices with gold in some instances. These results are reasonably robust to choice of model refits, forecast length and distributional assumptions.
•Data on emerging market stock prices, oil, gold, VIX, and bonds•Compare GO-GARCH with DCC-GARCH•Compare dynamic conditional correlations•Compare hedge ratios•Oil best for hedging emerging market stock prices
Choosing factors Fama, Eugene F.; French, Kenneth R.
Journal of financial economics,
05/2018, Letnik:
128, Številka:
2
Journal Article
Recenzirano
Our goal is to develop insights about the maximum squared Sharpe ratio for model factors as a metric for ranking asset pricing models. We consider nested and non-nested models. The nested models are ...the capital asset pricing model, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (1) cash profitability versus operating profitability as the variable used to construct profitability factors, (2) long-short spread factors versus excess return factors, and (3) factors that use small or big stocks versus factors that use both.
Advancing digitisation has both welfare enhancing and welfare reducing effects. The increase in market transparency, the reduction of transaction costs and technologically induced reductions in costs ...of production have price reducing and welfare increasing consequences. Monopoly tendencies and high switching costs, on the other hand, can increase market prices and reduce social welfare. Hence, one of the central economic policy challenges is to find proper instruments of competition policy in order to prevent the exploitation of market power and to realise the price reducing and welfare increasing effects of ongoing digitisation. JEL Classification: D41, L12, O30 Das theoretische Ideal der Volkswirtschaftslehre ist das Modell der vollstandigen Konkurrenz. Wegen der hohen Anforderungen an dieses Modell gibt es in der Realitat nur wenige Markte, die diesem Ideal entsprechen. Die Digitalisierung kann die okonomische Realitat durch eine hohere Markttransparenz und verringerte Transaktionskosten naher an dieses idealtypische Konzept heranfuhren und damit die Wohlfahrt erhohen. Es ist aber auch denkbar, dass die Digitalisierung zu Monopolen oder neuen Informationsasymmetrien fuhrt, die eine starkere Abweichung von der vollstandigen Konkurrenz mit Wohlfahrtsverlusten bedeutet.
To attenuate an inherent errors-in-variables bias, portfolios are widely employed to test asset pricing models; but portfolios might mask relevant risk- or return-related features of individual ...stocks. We propose an instrumental variables approach that allows the use of individual stocks as test assets, yet delivers consistent estimates of ex post risk premiums. This estimator also yields well-specified tests in small samples. The market risk premium under the capital asset pricing model (CAPM) and the liquidity-adjusted CAPM, premiums on risk factors under the Fama–French three- and five-factor models, and the Hou et al. (2015) four-factor model are all insignificant after controlling for asset characteristics.
The ratio of gold to platinum prices (GP) reveals persistent variation in risk and proxies for an important economic state variable. GP predicts future stock returns in the time series, explains ...stock return variation in the cross-section, and is significantly correlated with option-implied tail risk measures. Contrary to conventional wisdom, gold prices fall in recessions, albeit by less than platinum prices. A model featuring recursive preferences, time-varying tail risk, and preference shocks for gold and platinum can account for asset pricing dynamics of equity, gold, and platinum markets, rationalize the return predictability, and explain why gold prices fall in bad times.
Betting against beta Frazzini, Andrea; Pedersen, Lasse Heje
Journal of financial economics,
January 2014, 2014-01-00, 20140101, Letnik:
111, Številka:
1
Journal Article
Recenzirano
Odprti dostop
We present a model with leverage and margin constraints that vary across investors and time. We find evidence consistent with each of the model's five central predictions: (1) Because constrained ...investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for US equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures. (2) A betting against beta (BAB) factor, which is long leveraged low-beta assets and short high-beta assets, produces significant positive risk-adjusted returns. (3) When funding constraints tighten, the return of the BAB factor is low. (4) Increased funding liquidity risk compresses betas toward one. (5) More constrained investors hold riskier assets.
In certain electricity markets, because of nonconvexities that arise from their operating characteristics, generators that follow the independent system operator's (ISO's) decisions may fail to ...recover their cost through sales of energy at locational marginal prices. The ISO makes discriminatory side payments to incentivize the compliance of generators. Convex hull pricing is a uniform pricing scheme that minimizes these side payments. The Lagrangian dual problem of the unit commitment problem has been solved in the dual space to determine convex hull prices. However, this approach is computationally expensive. We propose a polynomially solvable primal formulation for the Lagrangian dual problem. This formulation explicitly describes for each generating unit the convex hull of its feasible set and the convex envelope of its cost function. We cast our formulation as a second-order cone program when the cost functions are quadratic, and a linear program when the cost functions are piecewise linear. A 96-period 76-unit transmission-constrained example is solved in less than 15 s on a personal computer.
Abstract
Bitcoin provides its users with transaction-processing services which are similar to those of traditional payment systems. This article models the novel economic structure implied by ...Bitcoin’s innovative decentralized design, which allows the payment system to be reliably operated by unrelated parties called miners. We find that this decentralized design protects users from monopoly pricing. Competition among service providers within the platform and free entry imply no entity can profitably affect the level of fees paid by users. Instead, a market for transaction-processing determines the fees users pay to gain priority and avoid transaction-processing delays. The article (i) derives closed-form formulas of the fees and waiting times and studies their properties, (ii) compares pricing under the Bitcoin Payment System to that under a traditional payment system operated by a profit-maximizing firm, and (iii) suggests protocol design modifications to enhance the platform’s efficiency. The Appendix describes and explains the main attributes of Bitcoin and the underlying blockchain technology.
We study short-maturity ("weekly") S&P 500 index options, which provide a direct way to analyze volatility and jump risks. Unlike longer-dated options, they are largely insensitive to the risk of ...intertemporal shifts in the economic environment. Adopting a novel seminonparametric approach, we uncover variation in the negative jump tail risk, which is not spanned by market volatility and helps predict future equity returns. As such, our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always "signaled" by the level of market volatility and elude standard asset pricing models.
PDF
