An empirical comparison of transformed diffusion models for VIX and VIX futures

Transformed diffusions (TDs) are nonlinear functions of continuous-time affine diffusion processes. Since they are flexible models with tractable analytic properties, financial modelling with TDs has become increasing popular in recent years. We first provide a formal classification of TD models into drift-driven, diffusion-driven, and distribution-driven according to their empirical emphases and specification strategies. Motivated by the stylized distributional features of VIX such as skewness and excess kurtosis, we then propose a pair of new distribution-driven TDs for modelling VIX dynamics and pricing VIX futures by directly incorporating such information into the specification of the transformation. We conduct a comprehensive empirical investigation into the relative performance of the three classes of models against several empirically relevant criteria. Our focus is on the in-sample goodness-of-fit measure and the out-of-sample forecast accuracy for modelling VIX and pricing VIX futures, as well as the stock return predictability of the implied Variance Risk Premium. Our findings demonstrate that the newly proposed distribution-driven models have clear advantages over well-established alternatives in most of our exercises

Does the Volatility of Volatility Risk Forecast Future Stock Returns?

This study investigates whether the forward-looking volatility of aggregate volatility (VOV) risk forecasts future stock returns in the US equity market. We find that stocks with higher sensitivities to changes in VOV constructed from VIX options have higher future returns than those with lower sensitivities. In particular, VOV constructed from deep out-of-the-money put options has the strongest predictive power, and the strongest predictability of VOV betas is found for investment horizons between 10-day to 1-month. Our findings are robust after considering estimation uncertainty of VOV betas and controlling for common pricing factors

Synchronisation of Policy Related Uncertainty, Financial Stress and Economic Activity in the USA

This study analyses the synchronisation of economic activity, financial stress and uncertainty in the USA by employing a wavelet-based approach of cohesion. Being innovative in the choice of the methodological framework as well as underlying factors of interest, we employed the monthly data on the policy-related uncertainty indexes, Chicago Fed National Activity Index (CFNAI) and Kansas City Federal Reserve Financial Stress Index (KCFSI). Our key empirical findings suggest that the co-movements of policy uncertainty, financial stress and economic activity are frequencies as well as time-dependent. The uncertainty indices are found to be synchronised at lower and intermediate frequencies for all of the pairs. In the nexus between uncertainty and economic activity, financial stress plays a crucial role. Co-movement of the policy uncertainty is observed to be more pronounced during the crisis periods though at different frequencies which indicated the usefulness of the proposed framework to analyse the implications of contemporaneous policy uncertainty and financial stress for the real economy. Concomitantly this informs the policy efforts to address the financial and economic instabilities which may arise as a consequence of financial stress and policy uncertainty

The mental health disaster in conflict settings: Can scientific research help?

Neuner F, Elbert T. The mental health disaster in conflict settings: Can scientific research help? BMC Public Health. 2007;7(1): 275

Underwriting Apophenia and Cryptids: Are Cycles Statistical Figments of our Imagination?

This paper re-examines the evidence in favour of the existence of underwriting cycles in property and casualty insurance and their economical significance. Using a meta-analysis of published papers in the area of insurance economics, we show that the evidence supporting the existence of underwriting cycles is misleading. There is, in fact, little evidence in favour of insurance cycles with a linear autoregressive character. This means that any cyclicality in firm profitability in the property and casualty insurance industry is not predictable in a classical econometric framework. It follows that pricing in the property and casualty insurance industry is not incompatible with that of a competitive market

Business models innovation in investment banks: A resilience perspective

© 2020, The Author(s). Firms frequently change their business models in order to respond to internal and external challenges. This study aims to explore how investments banks adjust their business models in response to internal and external challenges. Based on a qualitative data from ten major investment banks operating in the largest financial market in the Middle East, we show that investment banks can achieve resilience by adjusting their business models through continuous activity changes in response to internal and external challenges. Specifically, investment banks adjust their business models through deploying alternative combinations of activities from a broad repertoire of activities. Within the same bank, divisions that respond to external challenges tend to sustain their performance, whereas resilient divisions that respond to both internal and external challenges tend to bounce back or achieve substantial increase in performance levels. This study contributes to the literature by proposing resilience as an alternative approach to business model innovation and by providing insight into how firms adjust their business models by altering specific activities in response to both internal and external challenges

Fiscal and monetary policies in the BRICS: A panel VAR approach

Using a Panel Vector Auto-Regressive (PVAR) model, we assess the macroeconomic impact of fiscal policy and monetary policy shocks for five key emerging market economies—Brazil, Russia, India, China and South Africa (BRICS). We show that monetary contractions lead to a fall in real economic activity and tighten liquidity market conditions, while government spending shocks have strong Keynesian effects. We also find evidence supporting the existence of accommodative stance between fiscal policy and monetary policy, which is crucial for economic and political decision-making. Our results are robust even after controlling for periods of extreme instability, such as economic and financial crises.COMPETE, QREN, FEDER, FC