Did the unification of commercial and investment banking heighten risk in financial markets due to moral hazard of borrowers? In a simple intertemporal model with moral hazard and uninsured risk, we argue that if financial contracts are properly written, the integration in financial markets could give rise to greater risk sharing arrangement and could eliminate the equity risk premium attribute...

This study examines the performance of the S&P 100 implied volatility as a forecast of future stock market volatility. The results indicate that the implied volatility is an upward biased forecast, but also that it contains relevant information regarding future volatility. The implied volatility dominates the historical volatility rate in terms of ex ante forecasting power, and its forecast err...

In the wake of emerging market turmoil, the role and welfare consequences of volatility have attracted renewed attention. An emerging consensus points to various types of volatility being both a consequence and a determinant of longerterm growth performance. The linkages appear to be context dependent. This paper employs classification tree analysis to explore determinants of consumption volati...

This study investigates whether intraday returns contain important information for forecasting daily volatility. Whereas in the existing literature volatility models for daily returns are improved by including intraday information such as the daily high and low, volume, the number of trades, and intraday returns, here the volatility of intraday returns is explicitly modelled. Daily volatility f...

This study demonstrates the impact of systematic risk on the prices of individual equity options. The option prices are characterized by the level and slope of implied volatility curves, and the systematic risk is measured as the proportion of systematic variance in the total variance. Using daily option quotes on the S&P 100 index and its 30 largest component stocks, we show that, after contro...

This paper focuses on the performance of various GARCH models in terms of their ability of delivering volatility forecasts for stock return data. Volatility forecasts obtained from a variety of mean and variance specifications in GARCH models are compared to a proxy of actual volatility calculated using daily data. In-sample tests suggest that a regression of volatility estimates on actual vola...

This paper proposes a consistent approach to discrete time valuation in insurance and finance. This approach uses the growth optimal portfolio as reference unit or benchmark. When used as benchmark, it is shown that all benchmarked price processes are supermartingales. Benchmarked fair price processes are characterized as martingales. No measure transformation is needed for the fair pricing of ...

Although dealership government and equity securities have, on the surface, similar market structures, the author demonstrates that some subtle differences exist between them that are likely to significantly affect the way market-makers trade, and as such have an impact on the liquidity that they provide. The author reviews some of the concepts recently introduced in the literature, examining mu...

Alternative strategies for predicting stock market volatility are examined. In out-of-sample forecasting experiments implied-volatility information, derived from contemporaneously observed option prices or history-based volatility predictors, such as GARCH models, are investigated, to determine if they are more appropriate for predicting future return volatility. Employing German DAX-index retu...

Motivated by the growing literature on volatility options and their imminent introduction in major exchanges, this paper proposes a new model that prices option contracts on volatility. To the best of our knowledge, the impact of volatility jumps in the valuation of volatility options has not yet been studied. The objective of this paper is to fill in this gap in the volatility derivatives lite...