Call and put implied volatilities and the derivation of option implied trees

Standard methodologies for the derivation of implied trees from option prices are based on the validity of the put-call parity. Muzzioli and Torricelli (2002) propose a methodology which accounts for PCP violations. Based on this latter approach the present paper advances in two main directions. First we propose a different methodology in order to imply the interval of artificial probabilities at each node of the tree. Secondly, we perform an empirical validation of the implied tree obtained, both in the sample and out of sample, by using DAX index options data set covering the period from January 4, 1999 to December 28, 2000. Numerical results are compared with one of the most used standard methodologies, i.e. Derman and Kani’s. The results suggest that the estimation proposed, by taking into account the informational content of both call and put prices, highly improves both the in-the-sample fitting and the out-of-sample performance.Binomial Method; Put-Call Parity; Choquet Pricing; Interval Tree.

The no arbitrage condition in option implied trees: evidence from the Italian index options market

A major issue in the construction of implied trees is the no arbitrage property preservation. Within the literature on deterministic smile-consistent trees using forward induction, two major contributions are: Derman and Kani (1994) and Barle and Cakici (1998). The former proposes a methodology to override the nodes that violate the no arbitrage condition. The latter extends the Derman and Kani’s algorithm, in order to increase its stability in the presence of high interest rates. The aim of the present paper is to modify the Derman and Kani’s methodology in order to improve the fit of the implied tree to option prices. The proposed methodology is compared with Barle and Cakici both in the sample and out of sample with Italian index options data. Overall findings support a better performance of the modified Derman and Kani’s methodology.Binomial tree; implied volatility; calibration.

Systemic risk measures and macroprudential stress tests An assessment over the 2014 EBA exercise

The European Banking Authority (EBA) stress tests, which aim to quantify banks’ capital shortfall in a potential future crisis (adverse economic scenario), further stimulated an academic debate over systemic risk measures and their predictive/informative content. Focusing on marked based measures, Acharya et al. (2010) provides a theoretical background to justify the use of Marginal Expected Shortfall (MES) for predicting the stress test results, and verify it on the first stress test conducted after the 2007-2008 crises on the US banking system (SCAP, Supervisory Capital Assessment Program). The aim of this paper is to further test the goodness of MES as a predictive measure, by analysing it in relation to the results of the 2014 European stress tests exercise conducted by EBA. Our results are strongly dependent on index used to capture the systemic distress event, whereby MES, based on a global market index, does not show association with EBA stress test, by contrast to F-MES, which is based on a financial market index, and has a significant information and predictive power. Our results may carry useful regulatory implication for the stress test exercises

The impact of the Fundamental Review of the Trading Book: A preliminary assessment on a stylized portfolio

The aim of this paper is to gauge the impact in terms of capital requirements of the Fundamental Review of the Trading Book (FRTB). To this end we take a stylized portfolio sensible to the risk factors mostly affected by the review and we implement the new regulation both under the Standard Approach (SA) and the Internal Model Approach (IMA). Our results provide an order of magnitude of the increase across the two regulations and the two approaches (SA and IMA), and disentangle the expected increase implied by the FRTB in its main effects both for the SA and IMA approach. Our analyses prove a very relevant increase especially under the SA and underscore possible implications of the review both in terms of regulamentary model’s choice and business strategies

Efficiency and unbiasedness of corn futures markets: New evidence across the financial crisis

Recent years witnessed commodity prices increases which have fostered researchworks on their predictability and a renewed interest of practitioners and policy makers. The objective of this paper is to test the predictive ability of futures prices on the underlying spot prices by taking corn, which is one of the most important agricultural commodities in terms of trading volumes and for its role in the dietary regime of many countries. We consider the corn futures on the CBOT in the period May 1998-December 2011 so as to extend previous studies on this market and to assess a possible effect of the financial crisis. Our results do not emphasize a role for the latter and, although we do not find evidence of efficiency and unbiasedness, the futures corn price turns out to be the best predictor of the spot price if compared with most used alternatives

Second homes: households' life dream or (wrong) investment?

While the purchase of a primary home is mainly motivated by essential consumption needs, buying a second house has been generally considered a good investment decision. However, second homes may results in many different final uses, ranging from holidays and profitable uses to definitely unprofitable ones. We contribute to the scant literature on second houses by exploring the case of second homes that remain unrented and represent the most notable unprofitable use. The empirical investigation relies on the 2002-2012 Bank of Italy Survey on Household Income and Wealth which, among other things, provides plenty of information on real estates, including the actual use. Our results on the unprofitable use of second homes highlight: a gender gap, whereby this case tends to be more clearly associated with male decision makers; no association with household’s economic characteristics; and, strong association with the specific real estate features, with inherited dwellings more likely to end up being unprofitably used. Thus our results, besides casting some doubts on the goodness of second homes as an investment decision, may have important policy implications on the housing and rental market and call for policy or regulatory interventions

"Climate Stress Test: bad (or good) news for the market? An Event Study Analysis on Euro Zone Banks"

The scope of this paper is to assess the effect 2021 ECB Climate stress test on the stock prices of the banks included in the exercise. To this end, we set up an event study analysis, whereby at the relevant dates we use market data in order to test for the existence of abnormal returns. Three main results emerge from our research. First, on 18.03.2021 investors’ fear arising from the details published about the methodology of the ECB climate stress test and some preliminary evidence had a negative impact on banks stock prices. Second, on the date of publication of the final results on 22.09.21, we find a positive reaction from market participants, since the market possibly expected the banks’ exposure to climate risks to be greater than the one emerging from final results. Third, on the starting date of COP26, an event related to the worldwide consensus on the need to manage climate change, we find a negative effects on banks’ quote that can be explained by the too tiny progresses reached by the summit, which are considered too mild and not adequate to reach the Paris Agreement goals. Finally, robustness tests including small banks not directly supervised by the ECB and banks with a business model not focused on credit intermediation, indicate that the market consider them less exposed to climate risks than larger banks. Our results may have implications in view of future climate stress tests