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Jel Classification:G13 

Report
Equity Volatility Term Premia

This paper estimates the term-structure of volatility risk premia for the stock market. Realized variance term premia are increasing in systematic risk and predict variance swap returns. Implied volatility term premia are decreasing in risk initially, but then increase at a lag, predicting VIX futures returns. By modeling the logarithm of realized variance, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. The model provides accurate pricing and highlights periods of dislocation between the index options and VIX futures markets. Term premia ...
Staff Reports , Paper 867

Working Paper
Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance

This article presents empirical evidence of a supply-induced transmission channel to longterm interest rates caused by a halt to government debt issuance. This is conceptually equivalent to a central bank operated asset purchase program, commonly known as quantitative easing (QE). However, as it involves neither asset purchases nor associated creation of central bank reserves, we refer to it as passive QE. For evidence, we analyze the response of Danish government bond risk premia to a temporary halt in government debt issuance announced by the Danish National Bank. The data suggest that ...
Working Paper Series , Paper 2023-24

Report
The costs and benefits of dual trading

This paper finds that marketmaking practices of dual traders are pit-specific. In the S&P 500 futures pit, the authors estimate that, because of a lower price impact, customers of dual traders pay eighteen cents less per contract on their trades, compared with customers of pure brokers. According to the authors' estimates, however, customers pay eleven cents more per contract for a purchase and receive nine cents less per contract for a sale, compared with the prices dual traders obtain for their own trades. Thus, the estimated net benefit of dual trading to customers in the S&P 500 futures ...
Staff Reports , Paper 2

Report
Arbitrage-free models of stocks and bonds

A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observable-factor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July ...
Staff Reports , Paper 656

Working Paper
The Global Determinants of International Equity Risk Premiums

We examine the commonality in international equity risk premiums by linking empirical evidence for the international stock return predictability of US downside and upside variance risk premiums (DVP and UVP, respectively) with implications from an international asset pricing framework, which takes the perspective of a US/global investor and features asymmetric global macroeconomic, financial market, and risk aversion shocks. We find that DVP and UVP predict international stock returns through different global equity risk premium determinants: bad and good macroeconomic uncertainties, ...
International Finance Discussion Papers , Paper 1318

Working Paper
The Effects of Asymmetric Volatility and Jumps on the Pricing of VIX Derivatives

This paper proposes a new collection of affine jump-diffusion models for the valuation of VIX derivatives. The models have two distinctive features. First, we allow for a positive correlation between changes in the VIX and in its stochastic volatility to accommodate asymmetric volatility. Second, upward and downward jumps in the VIX are separately modeled to accommodate the possibility that investors react differently to good and bad surprises. Using the VIX futures and options data from July 2006 through January 2013, we find conclusive evidence for the benefits of including both asymmetric ...
Finance and Economics Discussion Series , Paper 2015-71

Working Paper
Firm-Specific Risk-Neutral Distributions : The Role of CDS Spreads

We propose a method to extract individual firms' risk-neutral return distributions by combining options and credit default swaps (CDS). Options provide information about the central part of the distribution, and CDS anchor the left tail. Jointly, options and CDS span the intermediate part of the distribution, which is driven by moderate-sized jump risk. We study the returns on a trading strategy that buys (sells) stocks exposed to positive (negative) moderate-sized jump risk unspanned by options or CDS individually. Controlling for many known factors, this strategy earns a 0.5% premium per ...
International Finance Discussion Papers , Paper 1212

Report
Understanding mortgage spreads

Most mortgages in the U.S. are securitized in agency mortgage-backed securities (MBS). Yield spreads on these securities are thus a key determinant of homeowners? funding costs. We study variation in MBS spreads over time and across securities, and document a cross-sectional smile pattern in MBS spreads with respect to the securities? coupon rates. We propose non-interest-rate prepayment risk as a candidate driver of MBS spread variation and present a new pricing model that uses ?stripped? MBS prices to identify the contribution of this prepayment risk to the spread. The pricing model finds ...
Staff Reports , Paper 674

Report
Simple and reliable way to compute option-based risk-neutral distributions

This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage restrictions that can lead to negative probabilities and other implausible results. I give examples for equities, foreign exchange, and long-term interest rates.
Staff Reports , Paper 677

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Boyarchenko, Nina 5 items

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