Browsing by Subject "volatility"

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  • Vuorenmaa, Tommi (2004)
    The non-stationary character of stock market returns manifests itself through the volatility clustering effect and large jumps. An efficient way of representing a time series with such complex dynamics is given by wavelet methodology. With the help of a wavelet basis, the discrete wavelet transform (DWT) is able to break a time series with respect to a time-scale while preserving the time dimension and energy unlike the traditional Fourier transform which 'trades' time for frequency. Time-scale specific information is important if one accepts the view that stock market consists of heterogenous investors operating at different time-scales. In that case considerable more insight into the volatility dynamics is gained by looking at the data at several time-scales. At small time-scales, in particular, the locality of wavelet analysis allows one to fully exploit high-frequency data. Wavelet transforms are also fast to calculate, so they are ideally suited for analyzing large data sets. The 'large-scale aim' of this licentiate thesis is to first introduce wavelet methodology to econometricians and then to analyze stock market volatility with it. In more detail, the data consists of 5-minute observations of the liquid Nokia Oyj stock at the Helsinki Stock Exchange (HEX). Several microstructure problems have to be dealt with, some characteristic of the HEX. Pre-filtered volatility series is then being analyzed by the 'maximal overlap' DWT to study both the global and local scaling laws in a turbulent 'IT-bubble' (1999 - 2000) and its calmer aftermath period (2001 - 2002). Significant time-scale specific differences between these two periods are found. The global scaling laws may not be time-invariant as usually claimed. The bubble period also experienced stronger long-memory in volatility than its aftermath. Thus long-memory may be time-varying as well. Such a finding can be applied in a locally stationary stochastic volatility model. Finally, the effects of the intraday volatility periodicity are studied and they are also found to be significant.
  • Haga, Jesper (Svenska handelshögskolan, 2016)
    Economics and Society – 294
    Asset pricing models provide investors with a relation between risk and expected returns. Higher risk levels should be linked to higher expected returns. In addition, trading strategies that earn risk adjusted abnormally high or low returns are referred to as asset pricing anomalies. These asset pricing anomalies present an important challenge for us researchers. Either our asset pricing models are incorrect or there exist frictions in the capital markets allowing such anomalies to persist. A better understanding of these anomalies can help in the development of asset pricing models. Knowledge about these anomalies is of course gained by studying them, which is where my thesis comes in. This dissertation investigates three different topics in asset pricing literature. The first two papers study anomalies. In the first essay the momentum anomaly is investigated. In this respect, the momentum strategy consists of buying previous outperformers and selling previous underperformers. Moreover, this strategy generates abnormal returns. More specifically, the first essay studies the robustness of intermediate-term momentum. The result suggests that the difference found between short-term and intermediate-term momentum is mainly driven by low credit risk firms and that the optimal momentum strategy can be dependent on firm characteristics. In the second essay we investigate the credit risk puzzle. Previous studies have shown that firms with a high credit risk exhibit lower excepted returns than firms with a low credit risk. This phenomenon is referred to as the credit risk puzzle. Contrary to previous findings, we suggest that the credit risk puzzle is only a temporary occurrence. Furthermore, the reason for this temporary mispricing of high credit risk firms could be the result of stronger limits to arbitrage during the subsample or possibly due to a sudden increased power to the debtholders during the early subsample. The third essay shows that a higher reporting frequency can act as a stabilizing factor in times of market distress. Firms that report quarterly instead of semi-annually experience lower stock price volatility during times of market distress. However, the important systematic volatility is higher for stock prices of firms that report quarterly. Ultimately, there exists a trade-off between higher firm specific systematic volatility on average and lower total volatility in times of market distress.
  • Nyberg, Peter (Svenska handelshögskolan, 2009)
    Economics and Society
    Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.
  • Kuttu, Saint (Svenska handelshögskolan, 2012)
    Economics and Society – 245
    The 2008 financial crisis brought to the fore the relative resilience of emerging and frontier equity markets. This has made international investors to turn their attention to emerging and frontier equity markets to minimise their down side risk exposure. Against this backdrop, it is important for international investors to understand and appreciate the unique features such as pervasive thin trading and severe illiquidity which impact on the evolution of returns and volatility in these equity markets. This thesis, which consists of three essays, examines the first and the second moment dynamics in thinly traded African equity markets. The main findings of the first essay suggest a reciprocal return stimuli spillover between Ghana and Kenya, and between Nigeria and South Africa. South Africa passes past return stimuli to Kenya and Nigeria but receives none. In the second moment, however, Nigeria appears to be the dominant one. Specifically, Nigeria exports volatility stimuli to Kenya and South Africa and receives none. Bad news from Kenya increases volatility on the equity market of Ghana more than good news of equal magnitude from the same source. Also, for the equity markets of Ghana, Nigeria and South Africa, changes in volatility in the four markets from domestic shocks are comparatively more important than the innovations from the other markets. Essay two reports a bi-directional mean relationship between the equity and foreign exchange markets of Ghana. Also past returns in the foreign exchange market influence current returns in the equity market of Nigeria. In the second moment, previous volatility in the equity market of Ghana influences current volatility in the foreign exchange market and not vice versa. In addition, political violence related negative news affects the equity and the currency markets of Nigeria, but for Ghana, it only affects the equity market. Furthermore, ethnic violence related negative news affects respectively the returns of the equity and the foreign exchange markets of Ghana and Nigeria. Only the volatility in the foreign exchange markets of Ghana is sensitive to political violence related news. The findings in essay three suggest that conditional jumps are time varying, and jumps are sensitive to past shocks for the equity markets of Egypt and South Africa. For Nigeria, however, the jump intensity is constant. Jump sensitivity is persistent in all the equity markets, and only the equity market of South Africa displays jump volatility asymmetry. Overall, this thesis which, adjusted for thin trading before the models were applied, sheds light on the importance of the proper handling of the thin trading issue in order to minimise spurious dependencies from plaguing the results.
  • Varpula, Anna (Helsingin yliopisto, 2020)
    The volatility of commodity prices, such as agricultural products, metals and energy, have been fluctuating from year to year. Studies show that there are many fundamentals affecting the volatility of commodity prices. The increasing financialisation of commodity markets might affect the price volatility among other fundamentals. One way to invest widely in commodity markets is to invest in sector indices which consist of numerous underlying securities. The objective of this research is to measure the price volatility of commodity sector indices during economic fluctuations. This study also tries to answer whether volatilities of selected sector indices correlate to each other. In this research four sector indices, S&P GSCI Agriculture Official Close Index ER, S&P GSCI All Cattle Official Close Index, S&P GSCI Energy Official Close Index and S&P GSCI Industrial Metals Official Close Index, were selected to measure the volatility and correlation. Fifth variable, S&P 500 Index was used to identify the periods of up and down markets and measure the correlation of commodity sector indices against that. A covariance-variance matrix was applied to measure the correlation. Econometrical approach to measure volatility was achieved by applying seven different univariate and multivariate GARCH (Generalised Auto Regressive Conditional Heteroscedasticity) models. The results suggest that the volatility and correlation in volatility models have been highest during the period of when the prices of S&P 500 Index were lowest. The volatility and correlation coefficient mainly follow the market fluctuation of S&P 500 Index. The results also indicate the pattern of volatility of the selected indices seem to be mainly similar except for one (S&P GSCI All Cattle Official Close Index). The mean values of coefficient correlation in multivariate models were mainly positive, fluctuating between -0.0000459 and 0.003934. This study supports the theory that volatility increases when market prices decrease. This study also shows evidence that when the volatility is high, also the correlation is high. This means that in the bear markets when correlation is higher, the benefit of diversification in these selected indices does not, in general, minimise the risk.
  • Häkkinen, Ella (Helsingin yliopisto, 2020)
    Atmospheric aerosol particles affect Earth’s radiation balance, human health and visibility. Secondary organic aerosol (SOA) contributes a significant fraction to the total atmospheric organic aerosol, and thus plays an important role in climate change. SOA is formed through oxidation of volatile organic compounds (VOCs) and it consists of many individual organic compounds with varying properties. The oxidation products of VOCs include highly oxygenated organic molecules (HOM) that are estimated to explain a large fraction of SOA formation. To estimate the climate impacts of SOA it is essential to understand its properties in the atmosphere. In this thesis, a method to investigate thermally induced evaporation of organic aerosol was developed. SOA particles were generated in a flow tube from alpha-pinene ozonolysis and then directed into a heated tube to initiate particle evaporation. The size distribution of the particles was measured with parallel identification of the evaporated HOM. This method was capable of providing information of SOA evaporation behaviour and the particle-phase composition at different temperatures. Mass spectra of the evaporated HOM and particle size distribution data were analyzed. The obtained results suggest that SOA contains compounds with a wide range of volatilities, including HOM monomers, dimers and trimers. The volatility behaviour of the particulate HOM and their contribution to SOA particle mass was studied. Furthermore, indications of particle-phase reactions occurring in SOA were found.
  • Penttinen, Aku (Svenska handelshögskolan, 2001)
    Working Papers
    The low predictive power of implied volatility in forecasting the subsequently realized volatility is a well-documented empirical puzzle. As suggested by e.g. Feinstein (1989), Jackwerth and Rubinstein (1996), and Bates (1997), we test whether unrealized expectations of jumps in volatility could explain this phenomenon. Our findings show that expectations of infrequently occurring jumps in volatility are indeed priced in implied volatility. This has two important consequences. First, implied volatility is actually expected to exceed realized volatility over long periods of time only to be greatly less than realized volatility during infrequently occurring periods of very high volatility. Second, the slope coefficient in the classic forecasting regression of realized volatility on implied volatility is very sensitive to the discrepancy between ex ante expected and ex post realized jump frequencies. If the in-sample frequency of positive volatility jumps is lower than ex ante assessed by the market, the classic regression test tends to reject the hypothesis of informational efficiency even if markets are informationally effective.