Assessing the vulnerability to price spikes in agricultural commodity markets

We empirically examine the predictability of the conditions which are associated with a higher probability of a price spike in agricultural commodity markets. We find that the forward spread is the most significant indicator of probable price jumps in maize, wheat and soybeans futures markets, a result which is in line with the “Theory of Storage”. We additionally show that some option-implied variables add significant predictive power when added to the more standard information variable set. Overall, the estimated probabilities of large price increases from our probit models exhibit significant correlations with the historical sudden market upheavals in agricultural markets

Testing the predictive ability of corridor implied volatility under GARCH models

YesThis paper studies the predictive ability of corridor implied volatility (CIV) measure. It is motivated by the fact that CIV is measured with better precision and reliability than the model-free implied volatility due to the lack of liquid options in the tails of the risk-neutral distribution. By adding CIV measures to the modified GARCH specifications, the out-of-sample predictive ability of CIV is measured by the forecast accuracy of conditional volatility. It finds that the narrowest CIV measure, covering about 10% of the RND, dominate the 1-day ahead conditional volatility forecasts regardless of the choice of GARCH models in high volatile period; as market moves to non volatile periods, the optimal width broadens. For multi-day ahead forecasts narrow and mid-range CIV measures are favoured in the full sample and high volatile period for all forecast horizons, depending on which loss functions are used; whereas in non turbulent markets, certain mid-range CIV measures are favoured, for rare instances, wide CIV measures dominate the performance. Regarding the comparisons between best performed CIV measures and two benchmark measures (market volatility index and at-the-money Black–Scholes implied volatility), it shows that under the EGARCH framework, none of the benchmark measures are found to outperform best performed CIV measures, whereas under the GARCH and NAGARCH models, best performed CIV measures are outperformed by benchmark measures for certain instances

Option pricing methods in the City of London during the late 19th century

City of London traders in the late nineteenth century had a much more advanced understanding of option pricing than previously thought. © 2020, © 2020 Informa UK Limited, trading as Taylor & Francis Group

Investment under uncertainty with a zero lower bound on interest rates

This paper examines irreversible investment decisions when the interest rate is stochastic and constrained by a zero lower bound. In contrast to the commonly found negative relationship between investment and uncertainty, it is shown that the presence of a lower bound on interest rates induces an asymmetric effect of interest rate uncertainty on investment decision. When the interest rate is low an increase in interest rate volatility decreases the value of waiting and increases investment but when the interest rate is high an increase in interest rate volatility increases the value of waiting and decreases investment. © 2020 Elsevier B.V

The great divergence between the USO fund and WTI spot prices

This paper discusses the concept of the ‘roll yield’ and its impact on the performance of ETFs that invest in futures contracts of storable commodities. It argues that comparing the returns of a futures position to the returns of a spot position can be quite misleading. As a case study, it examines the returns of the USO exchange traded fund whose investment objective is to mimic the performance of WTI prices using futures contracts. A simple regression model shows that the significant underperformance of the USO fund relative to WTI spot prices has been caused by the prolonged contango market and the steep WTI futures curve in the post-2009 period. © 2022 Informa UK Limited, trading as Taylor & Francis Group

International Evidence on the Determinants of Domestic Sovereign Debt Bank Holdings

In this paper, we examine the determinants of bank holdings of domestic sovereign debt with a panel dataset of 295 banks in 35 countries between 2002 and 2013. The findings indicate that the structure of bank ownership (domestic, foreign, or government ownership), the quality of governance, and the level of financial development of the countries in which banks operate all determine the level of home bias. Specifically, we find that domestic banks tend to hold more domestic sovereign debt relative to their foreign counterparts. We also provide evidence that home bias is even stronger when the domestic bank is controlled by its government. Moreover, home bias increases when government bonds are more risky, home governments are less effective, and when banking systems are less financially developed. Overall, we find that banks’ home bias in holding sovereign debt is an international phenomenon that is determined by both bank- and country-specific factors. © 2019, The Author(s)

Environmental policy implications of extreme variations in pollutant stock levels and socioeconomic costs

This paper uses a real options approach to examine the impact of abrupt increases in carbon dioxide emissions and pollutant-related socio-economic costs. It derives optimal investment rules in the form of critical values for both pollutant stock levels and social costs, above which environmental policies should be adopted. Moreover, it determines the optimal emissions abatement level. Our analysis extends the methodology of Pindyck (2000) using jump diffusion processes. We show that if the stock of pollutant is subject to extreme variations and the emissions abatement level is chosen exogenously by the policymaker, then lower levels of the pollutant stock are required to trigger policy adoption. A similar, yet more prominent, effect is observed under the assumption that pollutant-related socio-economic costs and benefits are expected to exhibit abrupt changes. However, different results are obtained when we examine simultaneously the two interrelated decisions, namely, the optimal threshold of emissions abatement and the optimal abatement level. In this case, an increase in the size and/or probability of a jump increases the critical values of both pollutant stock levels and socio-economic costs but leads to higher optimal abatement. © 2013 The Board of Trustees of the University of Illinois

Bubble tests in the London housing market: A borough level analysis

In this study, we apply a recursive right-tailed test to investigate for evidence of “bubbles” in the London housing market. We implement the test using data from all London boroughs. Aggregate tests indicate long periods of explosive behaviour of housing prices in the London residential market. Applying the test at a regional level, we identify house price booms in five boroughs, and we detect bubbles in only three, out of the total 32 London boroughs. The test finds no-bubble condition in the inner London boroughs, even in the Prime Central London areas, where the highest house prices have been recorded. © 2020 John Wiley & Sons Lt

Parameter uncertainty in portfolio selection: Shrinking the inverse covariance matrix

The estimation of the inverse covariance matrix plays a crucial role in optimal portfolio choice. We propose a new estimation framework that focuses on enhancing portfolio performance. The framework applies the statistical methodology of shrinkage directly to the inverse covariance matrix using two non-parametric methods. The first minimises the out-of-sample portfolio variance while the second aims to increase out-of-sample risk-adjusted returns. We apply the resulting estimators to compute the minimum variance portfolio weights and obtain a set of new portfolio strategies. These strategies have an intuitive form which allows us to extend our framework to account for short-sale constraints, transaction costs and singular covariance matrices. A comparative empirical analysis against several strategies from the literature shows that the new strategies often offer higher risk-adjusted returns and lower levels of risk. © 2012