Consistent with findings in other markets, implied volatility is a biased predictor of the realized volatility of gold futures. No existing explanation—including a price of volatility risk— can completely explain the bias, but much of this apparent bias can be explained by persistence and estimation error in implied volatility. Statistical criteria reject the hypothesis that implied volatility ...

We present a family of hedging strategies for a European derivative security in a stochastic volatility environment. The strategies are robust to speciication of the volatility process and do not need a parametric description of it or estimation of the volatility risk premium. They allow the hedger to control the probability of hedging success according to risk aversion. The formula exploits th...

A volatility model must be able to forecast volatility; this is the central requirement in almost all financial applications. In this paper we outline some stylised facts about volatility that should be incorporated in a model; pronounced persistence and meanreversion, asymmetry such that the sign of an innovation also affects volatility and the possibility of exogenous or pre-determined variab...

This paper documents a new " stylized fact " regarding commodity prices using alternative datasets covering the period from 1880 to 1996: The volatility of real commodity prices, defined as nominal commodity prices deflated by the manufacturing unit value index, is higher under flexible-exchange rate regimes than fixed-exchange rate regimes. Furthermore, changes in exchange regime are associate...

We introduce habit formation in a model that studies the link between international trade in financial assets, economic growth, and welfare. As with time separable preferences asset trade increases the mean growth rate, but it also increases growth-volatility. We demonstrate that the welfare gain from asset trade is lower with habit persistence in consumption. This reflects that the habit-formi...

In this paper, we demonstrate that most of Tokyo stock return data sets have volatility persistence and it is due to a parameter change in underlying GARCH models. For testing for a parameter change, we use the cusum test, devised by Lee et al. (2003), based on the residuals from GARCH models. A simulation study shows that a parameter change in GARCH models can mislead analysts to choose an IGA...

This paper examines the dynamics of stock prices in Ukraine by estimating the degree of persistence of the PFTS stock market index. Using long memory techniques we show that the log prices series is I(d) with d slightly above 1, implying that returns are characterised by a small degree of long memory and thus are predictable using historical data. Moreover, their volatility, measured as the abs...

We analyze the effect of model instability on long-term investors using a time-varying VAR(1) model that we estimate using Bayesian Markov Chain Monte Carlo techniques for state-space specifications. Our model is able to handle time-varying intercepts, time-varying slopes, time-varying volatility, time-varying correlation, the leverage effect and fat tails. We calculate the optimal portfolios o...