Theory suggests that economic freedom—measured by the Economic Freedom of the World Index (EFW) -may increase or decrease economic volatility. Similar to previous literature, we empirically test the relationship between economic freedom and economic volatility, but we differ from the literature in how we account for (1) changes in EFW, and (2) the nonlinear relationship between freedom and vola...

There is much literature that deals with modeling and forecasting asset return volatility. However, much of this research does not attempt to explain variations in the level of volatility. Movements in volatility are often linked to trading volume or frequency, as a reflection of underlying information flow. This paper considers whether the state of an open limit order book influences volatilit...

Many empirical studies have found a positive relationship between return volatility and trade volume. A number of theoretical papers predict this volume/volatility relationship. In contrast, Jones, Kaul and Lipson (1989) find that return volatility is best explained by transaction counts, rather than volume or average trade size. Our paper tests the robustness of this trade count/volatility res...

Stock market volatility is the systematic risk faced by investors who hold a market portfolio (e.g., a stock market index fund). Schwert (1989b) has undertaken an extensive study of stock market volatility, using historical data back to the 19th century. Some of his major findings are illustrated in Figure 1, which plots quarterly stock market volatility for the post-World War II period.1 The f...

We show that introducing stochastic idiosyncratic operating risk into an equity valuation model of firms with growth options explains two empirical anomalies related to idiosyncratic volatility: the positive contemporaneous relation between stock returns and changes in idiosyncratic return volatility, and the poor performance of stocks with high idiosyncratic volatility. The model further predi...

This paper examines volatility transmission in oil, ethanol and corn prices in the United States between 1997 and 2011. We follow a multivariate GARCH approach to evaluate the level of interdependence and the dynamics of volatility across these markets. Preliminary results indicate a higher interaction between ethanol and corn markets in recent years, particularly after 2006. We only observe, h...

By means of classical Itô’s calculus we decompose option prices as the sum of the classical Black-Scholes formula with volatility parameter equal to the root-mean-square future average volatility plus a term due by correlation and a term due to the volatility of the volatility. This decomposition allows us to develop …rst and second-order approximation formulas for option prices and implied vol...

Recently the Bundesbank claimed that monetary targeting has become considerably more di cult by the increased volatility of short term money growth The present paper investigates the impact of German money growth volatility on income velocity and money demand in view of Friedman s money growth volatility hypothesis Granger causality tests provide some evidence for a velocity volatility linkage ...

This paper investigates nonlinear features of FX volatility dynamics using estimates of daily volatility based on the sum of intraday squared returns. Measurement errors associated with using realized volatility to estimate ex post latent volatility imply that standard time series models of the conditional variance become variants of an ARMAXmodel. We explore nonlinear departures from these lin...

For asset prices that follow stochastic-volatility diffusions, we use asymptotic methods to investigate the behavior of the local volatilities and Black–Scholes volatilities implied by option prices, and to relate this behavior to the parameters of the stochastic volatility process. We also give applications, including risk-premium-based explanations of the biases in some näıve pricing and hedg...