The Competitiveness of the European ICT Industry

This paper investigates the international competitiveness of the European ICT sector. We use Labour productivity, R&D expenses and trade performance as proxies of competitiveness. The empirical analysis of 39 countries between 1999 and 2004 confirms our main hypothesis that the EU is performing better in the ICT services industry relative to manufacturing. In general, the average EU production efficiency is larger in the services sector, than in manufacturing. The study has important policy implications. Appropriate policies should be implemented – especially in the ICT manufacturing sector – for making EU more competitive in “non- price factors”, such as policies that facilitate the transformation of R&D expenses into product innovation. There are clearly areas for improvement in the way R&D is carried out in the ICT sector within the EU, with respect to both the allocation of R&D investment and the process of producing results from R&D

Sovereign debt markets in light of the shadow economy

We investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets. In addition to a standard ordered probit regression, we employ two nonparametric neural network modeling techniques in order to capture possible complex interactions between our variables. Results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs. MLP neural networks offer the best fit to the data, followed by the RBF neural networks and probit regression, respectively. The results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector. Our study has important implications, especially in the context of the ongoing sovereign debt crisis, since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs. Finally, a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector

Interest Rate Volatility and Risk Management: Evidence from CBOE Treasury Options

This paper investigates US Treasury market volatility and develops new ways of dealing with the underlying interest rate volatility risk. We adopt an innovative approach which is based on a class of model-free interest rate volatility (VXI) indices we derive from options traded on the CBOE. The empirical analysis indicates substantial interest rate volatility risk for medium-term instruments which declines to the levels of the equity market only as the tenor increases to 30 years. We show that this risk appears to be priced in the market and has a significant time-varying relationship with equity volatility risk. US Treasury market volatility is appealing from an investment diversification perspective since the VXI indices are negatively correlated with the levels of interest rates and of equity market implied volatility indices, respectively. Although VXI indices are affected by macroeconomic and monetary news, they are only partially spanned by information contained in the yield curve. Motivated by our results on the magnitude and the nature of interest rate volatility risk and by the phenomenal recent growth of the equity volatility derivative market, we propose the use of our VXI indices as benchmarks for monitoring, securitizing, managing and trading interest rate volatility risk. As a first step in this direction, we describe a framework of one-factor equilibrium models for pricing VXI futures and options on the basis of empirically favored mean-reverting jump-diffusions

Modeling CO2 emission allowance prices and derivatives:Evidence from the European trading scheme

This paper studies the three main markets for emission allowances within the European Union Emissions Trading Scheme (EU ETS): Powernext, Nord Pool and European Climate Exchange (ECX). The analysis suggests that the prohibition of banking of emission allowances between distinct phases of the EU ETS has significant implications in terms of futures pricing. Motivated by these findings, we develop an empirically and theoretically valid framework for the pricing and hedging of intra-phase and inter-phase futures and options on futures, respectively

A Jump Diffusion Model for VIX Volatility Options and Futures

Volatility indices are becoming increasingly popular as a measure of market uncertainty and as a new asset class for developing derivative instruments. Although jumps are widely considered as a salient feature of volatility, their implications for pricing volatility options and futures are not yet fully understood. This paper provides evidence indicating that the time series behaviour of the VIX index is well approximated by a mean reverting logarithmic diffusion with jumps. This process is capable of capturing stylized facts of VIX dynamics such as fast mean-reversion at higher levels, level effects of volatility and large upward movements during times of market stress. Based on the empirical results, we provide closed-form valuation models for European options written on the spot and forward VIX, respectively

The S&P 500 Index inclusion effect: Evidence from the options market

This paper employs forward-looking information from the options market to shed light on the comovement implications of S&P 500 index inclusion events over the 1997-2020 period. To this end, we test if forward–looking implied betas impound significant pre-inclusion information that is not embedded in historical betas. The empirical results show that the increase in post-inclusion implied betas is significantly smaller than the corresponding increase in historical or hybrid betas. In most cases, changes in implied betas show no evidence of excess comovement after S&P 500 index inclusion. Our findings suggest that added stocks experience changes prior to the index addition announcement and this leads to the “index inclusion effect” reported to the literature

The S&P 500 Index inclusion effect: Evidence from the options market

This paper employs forward-looking information from the options market to shed light on the comovement implications of S&P 500 index inclusion events over the 1997-2020 period. To this end, we test if forward–looking implied betas impound significant pre-inclusion information that is not embedded in historical betas. The empirical results show that the increase in post-inclusion implied betas is significantly smaller than the corresponding increase in historical or hybrid betas. In most cases, changes in implied betas show no evidence of excess comovement after S&P 500 index inclusion. Our findings suggest that added stocks experience changes prior to the index addition announcement and this leads to the “index inclusion effect” reported to the literature