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Working Paper
Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications
We develop a new framework to measure market-wide (systemic) tail risk in the cross-section of high-frequency stock returns. We estimate the time-varying jump intensities of asset prices and introduce a testing approach that identifies multi-asset tail risk based on the release times of scheduled news announcements. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we find that most of the FOMC announcements create systemic left tail risk, but there is no evidence that macro announcements do so. The magnitude of the tail risk induced by Fed news varies ...
Working Paper
Mind Your Language: Market Responses to Central Bank Speeches
Researchers have carefully studied post-meeting central bank communication and have found that it often moves markets, but they have paid less attention to the more frequent central bankers’ speeches. We create a novel dataset of US Federal Reserve speeches and use supervised multimodal natural language processing methods to identify how monetary policy news affect financial volatility and tail risk through implied changes in forecasts of GDP, inflation, and unemployment. We find that news in central bankers’ speeches can help explain volatility and tail risk in both equity and bond ...
Working Paper
Mind Your Language: Market Responses to Central Bank Speeches
Researchers have carefully studied post-meeting central bank communication and have found that it often moves markets, but they have paid less attention to the more frequent central bankers’ speeches. We create a novel dataset of US Federal Reserve speeches and develop supervised multimodal natural language processing methods to identify how monetary policy news affect financial volatility and tail risk through implied changes in forecasts of GDP, inflation, and unemployment. We find that news in central bankers’ speeches can help explain volatility and tail risk in both equity and bond ...
Working Paper
Which continuous-time model is most appropriate for exchange rates?
This paper attempts to realistically model the underlying exchange rate data generating process. We ask what types of diffusion or jump features are most appropriate. The most plausible model for 1-minute data features Brownian motion and Poisson jumps but not infinite activity jumps. Modeling periodic volatility is necessary to accurately identify the frequency of jump occurrences and their locations. We propose a two-stage method to capture the effects of these periodic volatility patterns. Simulations show that microstructure noise does not significantly impair the statistical tests for ...
Working Paper
Econometric modeling of exchange rate volatility and jumps
This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades. Academic researchers have sought to fit the three major characteristics of foreign exchange volatility: intraday periodicity, autocorrelation and discontinuities in prices. Early research modeled the autocorrelation in daily and weekly squared foreign exchange returns with ARCH/GARCH models. Increased computing power and availability of high-frequency data allowed later researchers to improve volatility and jumps estimates. Researchers also found it useful to incorporate information ...