The Forecasting Capacity of Housing Price Expectations

This study captures the essential elements of the price expectations of market participants in a rising market. Adopting a forward-looking approach, this paper explores the effectiveness of expectations as an indicator of forthcoming housing price changes in Hong Kong. Examination of the quarterly survey data from December 2003 to September 2007 indicates that both homeowners and non-homeowners tend to overestimate the probability of future housing price increases yet underestimate its volatility. This adds weight to the argument that market participants are generally not rational in the prediction of price movement. Homeowners, investors and potential home buyers have more or less the same level of confidence about the future market outlook. Like non-owners, they expect higher prices. The number of correct forecasts exceeds incorrect forecasts, suggesting that overall price expectations are fairly close to realization. It can be broadly concluded that the aggregate price expectations in the long run can be an appropriate forecasting tool for future market performance.Price expectations; Forecastability; Housing market; Hong Kong

The Informational Role of Implied Volatility : Examining the relation between implied volatility and S&P 100 returns around FOMC announcements

Volatility has been a widely discussed subject in financial research and many papers consider it synonymous with the risk of an investment. However, further research has revealed that besides exhibiting the level of risk, volatility has more wide-ranging implications. Empirical evidence indicates that the forward-looking measures of volatility may have informational value over future equity returns. This thesis studies the relation between implied volatility and equity returns around FOMC interest rate announcements. The main purpose of this thesis is to examine whether FOMC announcements increase the level of information that implied volatility contains about future stock returns. The research framework is motivated by the findings of Du, Fung & Loveland (2018) about the increased return predictability in the banking sector. This thesis contributes to the existing literature by examining the information content of implied volatility in a market-wide context. By using daily observations from 1995 to 2008, multivariate regressions are run in an attempt to explain stock returns by lagged changes in implied volatility and binary variables that identify FOMC announcement days. The possible impact of FOMC announcements on return predictability associated with implied volatility is studied by augmenting the model with an interaction variable. For further examination, daily changes in implied volatility are divided into quartiles so that it is possible to examine whether the magnitude of change in implied volatility impacts return predictability. Additionally, the sample period is divided into two subsamples so that any timely differences can be perceived. Finally, similar regressions are applied to the days surrounding the actual announcement days. The results of this thesis suggest that stock returns are positively associated with not only the lagged changes in implied volatility but also FOMC announcements in general. These findings are consistent with the previous studies. Regarding the hypothesized increase in return predictability, significant results are attained for certain subsamples and days following the FOMC announcements. Even though these results do not directly suggest that the findings of Du et al. (2018) apply in a market-wide context, this thesis provides qualified evidence that FOMC announcements have a positive influence on the predicting power of implied volatility. Therefore, this thesis motivates to examine the information content of implied volatility in future research as well

Market conditions, trader types and price–volume relation in energy futures markets

We investigate the asymmetric relations between trading volume and price changes, and trading volume and price volatility of energy futures contracts across maturities and under different market conditions. Using a relatively long sample of daily observations, we examine whether the impact of trading volume on returns and volatility of futures contracts can be time-varying and dependent on the market condition. We differentiate the market condition based on the slope of the forward curve into backwardation and contango. The results indicate that trading volume and returns are positively related when the market is in backwardation and negatively related when the market is in contango. In addition, the positive relation between changes in trading volume and volatility of futures contracts seem to be stronger when the market is in backwardation than when it is in contango. Finally, the results indicate that, to a certain extent, trade participation and trading activities of agents in energy futures markets can be explained by the slope of the forward curve which reflects the market condition and sentiment

Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro

This study proposes relative inflation forecast targeting as an operational framework of monetary policy for adopting the euro by the EU new Member States. This strategy assumes containing differentials between the domestic and the eurozone inflation forecasts as an operational target. A model prescribing the RIFT framework is presented along with a set of appropriate policy indicator variables and instrument rules. The proposed framework advances the strategy based on relatively strict inflation targeting that is currently pursued by some NMS. Several ARCHclass tests in various functional forms are employed for providing preliminary empirical evidence on convergence of inflation differentials relative to the euro area for Poland, Czech Republic and Hungary.http://deepblue.lib.umich.edu/bitstream/2027.42/40140/3/wp754.pd

Informational efficiency and spurious spillover effects between spot and derivatives markets

Derivatives markets produce the means for price discovery as leading indicators in the transmission of new information. Examining volatility spillovers between spot and derivatives markets without accounting for possible disequilibria in the long term relationship could potentially result in spurious spillover effects. Our paper aims to contribute in this literature by controlling for possible disturbances in the long-run equilibrium relationship between the two markets. By application of a regime shift approach we provide evidence of a time varying spillover effect from derivatives to spot markets. However, this effect is inconclusive in the absence of a significant (1 − 1) cointegration relationship

Model Risk and Its Control

In this paper, we analyze model risks separately in pricing models and risk measurement models as follows. (1) In pricing models, model risk is defined as "the risk arising from the use of a model which cannot accurately evaluate market prices, or which is not a mainstream model in the market." (2) In risk measurement models, model risk is defined as " the risk of not accurately estimating the probability of future losses." Based on these definitions, we examine various specific cases and numerical examples to determine the sources of model risks and to discuss possible steps to control these risks. Sources of model risk in pricing models include (1) use of wrong assumptions, (2) errors in estimations of parameters, (3) errors resulting from discretization, and (4) errors in market data. On the other hand, sources of model risk in risk measurement models include (1) the difference between assumed and actual distribution, and (2) errors in the logical framework of the model. Practical steps to control model risks from a qualitative perspective include improvement of risk management systems (organization, authorization, human resources, etc.). From a quantitative perspective, in the case of pricing models, we can set up a reserve to allow for the difference in estimations using alternative models. In the case of risk measurement models, scenario analysis can be undertaken for various fluctuation patterns of risk factors, or position limits can be established based on information obtained from scenario analysis.

The Flash Crash: An Examination of Shareholder Wealth and Market Quality

We investigate stock returns, market quality, and options market activity around the flash crash of May 6, 2010. Abnormal returns are negative on the day of and the day after the flash crash for stocks that had trades that executed during the crash subsequently cancelled by either Nasdaq or NYSE Arca. Consistent with studies that suggest that other sources of liquidity withdrew from the markets during the flash crash, we find that the fraction of trades executed by the NYSE increases during this volatile period. Market quality deteriorates following the flash crash as bid-ask spreads increase and quote depths decrease. Evidence from the options markets indicates that investor uncertainty increased around the time of the crash and remained elevated for several days

Recent Developments in International Currency Derivatives Market: Implications for Poland

This paper examines the critical problems of international currency derivatives that have emerged in international financial markets over the past two years, emphasizing the departures of spot exchange rate movements from the macroeconomic fundamentals among the “triad” currencies: the U.S. Dollar (USD), the German Mark (DM), and the Japanese Yen (YE). The macroeconomic variables that theoretically play a predominant role in the exchange rate movements are: differences in comparable market interest rates among the countries (interest rate differentials), differences in the rate of growth of real GDP (income differentials), and differences in the rates of inflation (inflation differentials). The changeable sensitivity of exchange rates to these key variables is tested in this paper for the “triad” currencies in two periods: 1991-1993, and 1994-1995. In the latter period, some considerable misalignments between forward rates and changes in spot exchange rates are observed. This is contrary to the historical evidence of the validity of the so-called “unbiased forward rate hypothesis” claiming that forward rates are the best predictor of adjustments of spot rates (Levich, 1976). It is argued that the recently observed failure of the relationship between forward rates and lagged spot rates has contributed to significant losses of investors and speculators in international currency derivative markets.Poland, International Currency Derivatives, International Financial Markets

Recent Developments in International Currency Derivatives Market: Implications for Poland

This paper examines currency derivatives that have emerged in international financial markets over the past two years, emphasizing the departures of spot exchange rate movements from the macroeconomic fundamentals among the “triad” currencies: the U.S. Dollar (USD), the German Mark (DM), and the Japanese Yen (YE). Sensitivity of exchange rates to key macroeconomic variables (differentials in interest rates, income and inflation) is tested for the “triad” currencies in two periods: 1991-1993 and 1994-1995. In the latter period, some considerable misalignments between forward rates and changes in spot exchange rates are observed. This is contrary to the historical evidence of the validity of the so-called “unbiased forward rate hypothesis” claiming that forward rates are the best predictor of adjustments of spot rates (Levich, 1976). It is argued that the recently observed failure of the relationship between forward rates and lagged spot rates has contributed to significant losses of investors and speculators in international currency derivative markets. The examination of these relationships and the recent empirical developments provides useful lessons for the transition economies of Central and Eastern Europe in their attempts to construct viable modern financial markets. This study limits the scope of recommendations for developing financial markets to the conditions of Poland. It assumes that currency-based derivative transactions may play a pivotal role in reducing systemic risk of external trade and financial contracts in the Polish economy presently undergoing considerable structural adjustments aimed at promoting export and net capital inflows. It further argues that an introduction of financial derivatives in Poland shall be preceded by a construction of sound underlying security markets. A stable currency accompanied by low inflation is necessary prerequisites for a successful functioning of currency-based derivatives.