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Report
Global variance term premia and intermediary risk appetite
Sellers of variance swaps earn time-varying risk premia for their exposure to realized variance, the level of variance swap rates, and the slope of the variance swap curve. To measure risk premia, we estimate a dynamic term structure model that decomposes variance swap rates into expected variances and term premia. Empirically, we document a strong global factor structure in variance term premia across the U.S., U.K., Europe, and Japan. We further show that variance term premia are negatively correlated with the risk appetite of hedge funds, broker-dealers, and mutual funds. Our results ...
Working Paper
The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited
This paper extends the previous literature on geographic (heat waves) and intertemporal (meteor showers) foreign exchange volatility transmission to characterize the role of jumps and cross-rate propagation. We employ heterogeneous autoregressive (HAR) models to capture the quasi-long-memory properties of volatility and the Shapley-Owen R2 measure to quantify the contributions of components. We conclude that meteor showers are more influential than heat waves, that jumps play a modest but significant role in volatility transmission and that significant, bidirectional cross-rate volatility ...
Speech
Transcript of the Cornell College of Business Annual New York City Predictions Event: February 15, 2017
Transcript of the Cornell College of Business Annual New York City Predictions Event: February 15, 2017.
Report
Liquidity and volatility in the U.S. treasury market
We model the joint dynamics of intraday liquidity, volume, and volatility in the U.S. Treasury market, especially through the 2007-09 financial crisis and around important economic announcements. Using various specifications based on Bauwens and Giot?s (2000) Log- ACD(1,1) model, we find that liquidity, volume, and volatility are highly persistent, with volatility having a lower short-term persistence than the other two. Market liquidity and volume are important to explaining volatility dynamics but not vice versa. In addition, market dynamics change during the financial crisis, with all ...
Report
The Law of One Price in Equity Volatility Markets
This paper documents law of one price violations in equity volatility markets. While tightly linked by no-arbitrage restrictions, the prices of VIX futures exhibit significant deviations relative to their option-implied upper bounds. Static arbitrage opportunities occur when the prices of VIX futures violate their bounds. The deviations widen during periods of market stress and predict the returns of VIX futures. A relative value trading strategy based on the deviation measure earns a large Sharpe ratio and economically significant alpha-to-margin. There is evidence that systematic risk and ...
Report
An index of Treasury Market liquidity: 1991-2017
Order book and transactions data from the U.S. Treasury securities market are used to calculate daily measures of bid-ask spreads, depth, and price impact for a twenty-six-year sample period (1991-2017). From these measures, a daily index of Treasury market liquidity is constructed, reflecting the fact that the varying measures capture different aspects of market liquidity. The liquidity index is then correlated with various metrics of funding liquidity, volatility, and macroeconomic conditions. The liquidity index points to poor liquidity during the 2007-09 financial crisis and around the ...
Discussion Paper
What Can We Learn from Prior Periods of Low Volatility?
Volatility, a measure of how much financial markets are fluctuating, has been near its record low in many asset classes. Over the last few decades, there have been only two other periods of similarly low volatility: in May 2013, and prior to the financial crisis in 2007. Is there anything we can learn from the recent period of low volatility versus what occurred slightly more than one year ago and seven years ago? Probably; the current volatility environment appears quite similar to the one in May 2013, but it?s substantially different from what happened prior to the financial crisis.
Working Paper
Land prices and unemployment
We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase in the ...
Working Paper
Economic Uncertainty before and during the COVID-19 Pandemic
We consider several economic uncertainty indicators for the United States and the UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future gross domestic product growth. Three results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak ...
Speech
LIBOR: The Clock Is Ticking
Remarks at the 2019 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City.