Essays on GMO effects on crop yields, the effects of pricing errors on implied volatilities and smoothing for seasonal time series with a long cycle

The dissetation includes three main parts, with the first part studies investigate empirically whether or not and to what extent the GM technology has improved realized yields. We study this question for non-irrigated U.S. maize and soybean yields over 1964-2010, having controlled for local effects, weather, fertilization and the pre-existing (non-GM) crop improvement trend. For maize we find that GM varieties have increased realized yields, with a stronger gain in the Central Corn Belt. For soybeans, GM varieties appear to have slightly reduced yields. For both crops we nd a strong trend in yield growth, which may have accelerated in recent years. The second part of the dissertation studies the impact of pricing errors on implied volatilities.Financial researchers and practitioners frequently propose their models and design the pricing formulae based on the observed implied volatility pattern in reality. We find that, in addition to the pattern caused by the mismatch of Black-Scholes formula and true pricing formulae, the observed implied volatility pattern is also influenced by the pricing errors. We propose to study the combined effects of pricing errors and pricing formula on the implied volatility. We find that implied volatility is adversely impacted by pricing errors and stylish patterns of the inverse Black-Scholes price function. Hence, the implied volatility is not a reliable estimator to the underlying volatility even it is carried out for short maturity at the money options. We propose an alternative volatility estimator by inverting a nonparametrically estimated price based on a kernel smoothing estimator of the underlying price function. The proposal can consistently recover the underlying volatility for general price formulae and is free of the afore-mentioned problems with the conventional implied volatility. The third part of the dissertation focused on a situation that the seasonal pattern is a long cycle and the study period covers only a few of the long cycles, such as a daily series with an annual pattern and includes only 5-30 years. This situation is in contrast with the asymptotic study, corresponding to the situation that the sample includes many long cycles, and has been ignored in the literature. Although the estimator based on seasonal-dummy-regression is consistent, unbiased and asymptotically normal-distributed, we find this estimator does not perform well in our focused situation. We propose smoothing the estimated long-cycle patterns by seasonal-dummy regression and evaluate the benefit of smoothing. We study our proposed smoothing-seasonal-dummy-regression estimator for seasonal time series with a long cycle and no short cycle, a short cycle and many short cycles, both theoretically, and via simulation studies, and then apply our methodology to an empirical study of the return rates of electricity prices

Is it Worth Tracking Dollar/Real Implied Volatility?

In this paper we examine the relation between dollar-real exchange rate volatility implied in option prices and subsequent realized volatility, in the period of February 1999 to June 2000. Our results are in line with recent literature, suggesting that the implied volatility obtained from a simple option-pricing model, although an upward-biased estimator of future volatility does provide information about volatility over the remaining life of the option, which is not present in past returns. Results are robust to the choice of two alternative time series models to explore information embedded in returns, a fixed volatility and a GARCH (1,1) model, even allowing for in-sample forecasts by the GARCH (1,1) model. Results are also robust to the choice of measuring realized volatility in two alternative ways.

Tracking Brazilian Exchange Rate Volatility

This paper examines the relation between dollar-real exchange rate volatility implied in option prices and subsequent realized volatility. It investigates whether implied volatilities contain information about volatility over the remaining life of the option which is not present in past returns. Using GMM estimation consistent with telescoping observations evidence suggests that implied volatilities give superior forecasts of realized volatility if compared to GARCH(p,q), and Moving Average predictors, and that econometric models forecasts do not provide significant incremental information to that contained in implied volatilities.implied volatility, telescoping observations, GMM

World Interest Rate, Business Cycles, and Financial Intermediation in Small Open Economies

The consensus about the ability of the standard open-economy neoclassical growth model to account for interest-rate driven business cycles has changed over time: whereas early research concluded that business cycles are neutral to interest-rate shocks, more recent investigations suggest that these shocks can explain a large extent of the business cycles of a small open economy when firms borrow to pay for their labor cost before cashing their sales. The first goal of this paper is to show that the recently found effectiveness of interest-rate shocks to cause business cycles rests more on the statistical properties of the shocks than on the working-capital constraint; in particular, recent results are only valid when the level and volatility of the interest rate are high and when the interest rate is negatively correlated with total factor productivity. The paper also shows that interest-rate shocks cannot be the sole driving force of business cycles even when the canonical model is augmented to include a working-capital constraint. The second goal of the paper is to quantitatively explore the dynamic properties of the neoclassical growth model extended to include financial intermediation. It is shown that the extended model with external effects in financial intermediation can match the negative correlation between GDP and a domestic borrowing-lending spread in emerging countries if the economy is subject to productivity shocks but not when the model is subject to both productivity and interest-rate shocks.financial intermediation; open-economy business cycles; interest rates; capital inflows

Calibration of local volatility using the local and implied instantaneous variance

We document the calibration of the local volatility in terms of local and implied instantaneous variances; we first explore the theoretical properties of the method for a particular class of volatilities. We confirm the theoretical results through a numerical procedure which uses a Gauss-Newton style approximation of the Hessian in the framework of a sequential quadratic programming (SQP) approach. The procedure performs well on benchmarks from the literature and on FOREX data.calibration; local volatility; implied volatility; Dupire formula; adjoint; instantaneous local variance;instantaneous implied variance; implied variance

Option pricing under fast-varying long-memory stochastic volatility

Recent empirical studies suggest that the volatility of an underlying price process may have correlations that decay slowly under certain market conditions. In this paper, the volatility is modeled as a stationary process with long-range correlation properties in order to capture such a situation, and we consider European option pricing. This means that the volatility process is neither a Markov process nor a martingale. However, by exploiting the fact that the price process is still a semimartingale and accordingly using the martingale method, we can obtain an analytical expression for the option price in the regime where the volatility process is fast mean-reverting. The volatility process is modeled as a smooth and bounded function of a fractional Ornstein-Uhlenbeck process. We give the expression for the implied volatility, which has a fractional term structure

Theory of storage, inventory and volatility in the LME base metals

The theory of storage, as related to commodities, makes two predictions involving the quantity of the commodity held in inventory. When inventory is low (i.e. a situation of scarcity), spot prices will exceed futures prices, and spot price volatility will exceed futures price volatility. Conversely, during periods of no scarcity, both spot prices and spot price volatility will remain relatively subdued. We test these predictions for the six base metals traded on the London Metal Exchange (aluminium, copper, lead, nickel, tin and zinc), and find strong validation for the theory. Including Chinese inventories reported by the Shanghai Futures Exchange strengthens the relationship further. We also introduce the concepts of excess volatility, inventory-implied spot price and inventory-implied spot volatility and illustrate some applications

The euro area Bank Lending Survey matters: empirical evidence for credit and output growth

This study examines empirically the information content of the euro area Bank Lending Survey for aggregate credit and output growth. The responses of the lending survey, especially those related to loans to enterprises, are a significant leading indicator for euro area bank credit and real GDP growth. Notwithstanding the short history of the survey, the findings are robust across various specifications, including “horse races” with other well-known leading financial indicators. Our results are supportive of the existence of a bank lending, balance sheet, and risk-taking channel of monetary policy. They also suggest that price as well as non-price conditions and terms of credit standards do matter for credit and business cycles. Finally, we discuss the implications for the 2007/2009 financial and economic crisis. JEL Classification: C23, E32, E51, E52, G21, G28bank lending survey, business cycle, credit cycle, euro area, Monetary policy transmission