We derive representations for the stock price drift and volatility in the equilibrium of agents with arbitrary, heterogeneous utility functions and with the aggregate dividend following an arbitrary Markov diffusion. We introduce a new, intrinsic characteristic of the aggregate dividend process that we call the ”rate of discounting volatility” and show that, in equilibrium, the size of market p...

The values of the parameters r, t, St, T , and K used to price a call option via the Black-Scholes formula can be easily obtained from market data. Estimating the volatility coefficient σ can be a more difficult task, and several estimation methods are considered in this section with some examples of how the Black-Scholes formula can be fitted to market data. We cover the historical, implied, a...

We study historical correlations and lead-lag relationships between individual stock risk (volatility of daily stock returns) and market risk (volatility of daily returns of a market-representative portfolio) in the US stock market. We consider the cross-correlation functions averaged over all stocks, using 71 stock prices from the Standard & Poor's 500 index for 1994-2013. We focus on the beha...

We investigate whether bonds can hedge volatility risk in the U.S. Treasury market, as predicted by most ‘affine’ term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed-maturity zero-coupon bonds (‘realized yield volatility’) through the use of high-frequency data. We find that the yield curve fai...

This paper investigates the relative pricing performance between constant volatility and stochastic volatility pricing models, based on a comprehensive sample of options on four currencies, including the British pound, Deutsche mark, Japanese yen and Swiss franc, traded frequently in the Philadelphia Stock Exchange (PHLX) from 1994 to 2001. The results show that the model of Heston (1993) outpe...

Based on a comprehensive investigation on Chinese Stock Market and macroeconomic policies, analyzing samples of the SSE Composite Index and relevant monetary and fiscal policies during the period from January 2000 to June 2008, this paper uses GARCH-type models and EVIEWS5.1 software to study effects of changes in macroeconomic policy on conditional volatility of Chinese Stock Market and analyz...

It is often presumed that higher market volatility begets more active trading in derivatives markets. A number of empirical studies have confirmed that such a positive relationship between volatility and activity exists. However, those studies have usually drawn on analyses that apply mainly to daily or intraday data. Very few studies have considered the existence of a possible relationship bet...

This paper studies liquidity and volatility commonality in the Canadian stock market. We show that five various liquidity measures display strong evidence of commonality at both market-wide and industry specific levels. Our findings extend the results of previous studies in liquidity commonality, and show that even after controlling for individual determinants of liquidity such as price, volume...

In this paper we extend the parametric, asymmetric, stochastic volatility model (ASV), where returns are correlated with volatility, by flexibly modeling the bivariate distribution of the return and volatility innovations nonparametrically. Its novelty is in modeling the joint, conditional, return-volatility, distribution with a infinite mixture of bivariate Normal distributions with mean zero ...