Over the past few decades, research in nancial economics has taken a high e¤ort to increase the
understanding of the volatility patterns of stock market returns. Indeed, good knowledge of return
volatility is crucial for portfolio choice, risk management and derivatives asset pricing. Perhaps
the most robust empirical regularity of stock return volatility is volatility clustering. As rst noted
by Mandelbrot (1963) when referring to stock market returns, "large changes tend to be followed
by large changes, of either sign, and small changes tend to be followed by small changes".
Despite the success in controlling ináation, during the late 1990s-early 2000 international
capital markets witnessed large swings in stock prices generating concern among academics
and policy-makers about the impact of stock price movements on the real economy and the
broader consequences of ináation targeting. Kontonikas and Ioannidis (2005) show that an
ináation targeting regime with strong interest rate reaction to ináation should lead to lower
stock market volatility. On the other hand, the New Environment Hypothesis (NEH, see
The purpose of this paper is to analyse the risk-neutral density derived from prices of DAX
options. We first estimate two specifications of the RND. Then, we focus on observable
factors that may drive changes in the moments of the RND. For this purpose, we investigate
the impact of various macroeconomic and financial variables on risk-neutral densities of stock
market movements. In this way, we attempt to uncover relationships between the implied
volatility, skewness and kurtosis computed from the RND and the underlying fundamentals of
the stock market.
Studies that estimate the effect on consumption of changes in housing wealth
and stock market wealth often ﬁnd that one of the coefﬁcients is insigniﬁcant.
For example, Tan and Voss (2003) use Australian data and ﬁnd a strong long-
run effect of stock market wealth but an insigniﬁcant housing wealth effect. In
addition, Case, Quigley and Shiller (2001) report a number of US studies that
use aggregate level or household level data and have had difﬁculty in ﬁnding
a signiﬁcant housing wealth effect.
The relationship between macroeconomic variables and stock market returns
is, by now, well-documented in the literature. However, a void in the literature
relates to examining the cointegration between macroeconomic variables and
stock market’s sector indices rather than the composite index. Thus in this
paper we examine the long-term equilibrium relationships between selected
macroeconomic variables and the Singapore stock market index (STI), as well
as with various Singapore Exchange Sector indices—the ﬁnance index, the
property index, and the hotel index.
Option trading enjoyed explosive growth during the late
1990s and into the start of the new millennium, particularly
among individuals. Traders whose bankrolls were fattened by
the great bull market in stocks fueled part of this growth. Having
enjoyed great success in the stock market, many people decided
to try to increase their gains by accessing the leverage associated
This free book of Exercises reinforces theoretical applications of stock market analyses as a guide to Corporate Valuation
and Takeover and other texts in the bookboon series by Robert Alan Hill. The volatility of global markets and individual
shares, created by serial financial crises, economic recession and political instability means that investors (private,
institutional, or corporate) cannot rely on “number crunching”.
The model yields the following results. First, the model is consistent with volatility clustering
or GARCH e¤ects. The market price of risk, which is the instantaneous component of stock return
volatility, has three components: endowment risk, sentiment risk and solvency risk. These three
components are persistent, hence the model reproduces volatility clustering or GARCH e¤ects.
Endowment risk is persistent because the "two-trees" feature of the model imply that endowment
risk is proportional to the shares of aggregate endowment, which uctuate randomly between zero
They have also become important international investors and trade
partners, and play a crucial role in world energy markets. Indeed, GCC countries are major
exporters of oil in global energy markets, so their stock markets may be susceptible to
changes in oil prices. However, the transmission mechanisms of oil price shocks to stock
returns in GCC markets should be different from those in net oil-importing countries.
The purpose of this paper is to analyse the risk-neutral density derived from prices of DAX
options. We focus on observable factors that may influence changes in the moments of the
RND. For this purpose, we investigate the impact of various macroeconomic and financial
variables on risk-neutral densities of stock market movements. In this way, we attempt to
uncover relationships between the implied volatility, skewness and kurtosis computed from
the RND and the underlying fundamentals of the stock market. Our sample runs from
December 1995 to November 2001.
There have been some attempts to explain theoretically the behavior of the stock return volatility.
Veronesi (1999) constructs a model with regime shifts in the endowments in which investors will-
ingness to hedge against their own uncertainty on the true regime generates overreaction to good
news in bad times and volatility clustering. In contrast to that paper, I assume that the exogenous
state variables are not subject to regimes, neither do they exhibit mean-reversion.
The 2007 global financial crisis ignited by reckless bankers and their flawed reward structures will be felt for years to come.
Emerging from the wreckage, however, is renewed support for the over-arching objective of traditional finance theory,
namely the long-run maximisation of shareholder wealth using the current market value of ordinary shares (common
stock) as a benchmark.
Capital planning plays a key role in banks’ business decisions. The cost of
equity financing and return targets on shareholders’ funds shape banks’ capital
allocation and product pricing. Given the importance of equity capital in
absorbing losses, prudential regulators require banks to hold sufficient equity
to cover risks. Regulation that motivates banks to raise equity financing when
capital is cheap would promote the interests of long-term shareholders. All
these considerations call for a better understanding of what drives the cost of
The basic data for this paper come from the merger of several databases. The most important
is the Hall-Liebman (1998) database of CEO stock option holdings, which contains precise
information on compensation, including characteristics of stock options for each CEO as well as
stock holdings, salary and bonus. Salary and bonus are obtained from proxy statements. The
procedure by which stock option values are computed is described in detail below and in the
I quantitatively measure the interactions between the media and the stock market
using daily content from a popularWall Street Journal column. I find that high media
pessimism predicts downward pressure on market prices followed by a reversion to
fundamentals, and unusually high or low pessimism predicts high market trading
The fourth empirical nding is the fact that the di¤erent volatility factors are due to systematic
risk, and therefore are priced in the cross section of stock returns. In a recent contribution, Adrian
and Rosenberg (2008) show that volatility factor models compare favorably to benchmark models
in explaining the cross section of stock returns.
While the statistical knowledge of stock return volatility is impressive, several questions remain
regarding their economic explanation.
Professor Wahlen's teaching and research interests focus on financial accounting, financial statement analysis and the capital markets. His research investigates earnings quality and earnings management; earnings volatility as an indicator of risk; fair value accounting for financial instruments; accounting for loss reserve estimates by banks and insurers; stock market efficiency with respect to accounting information; and testing the extent to which future stock returns can be predicted with earnings and other financial statement information. ...
Why does anyone invest money? Why place yourself at risk and expose yourself
to the volatility of the stock market? Why not just leave your capital in an
insured savings account?
Of course, there are logical answers to these questions. As an astute investor,
you already know that taking risk is an inherent part of investing your capital
anywhere. For example, you could opt to place all of your capital in an insured
account at your bank; in fact, many highly conservative investors do just that.
This option also involves risk, however...
Once an obscure subfield of finance, Market Microstructure has emerged as
a major stream of finance. In its narrowest sense, microstructure might be
defined as the study of the level and the source of transactions costs associated
with trading. It examines the organizational structure of exchanges and how the
specific market structure enhances the efficiency, transparency and information
dissemination of security trading.
In the forest, there are small creatures that move almost
effortlessly beneath the ghostly pall of a moonless night,
slipping through dense vegetation, a jumble of hazards and
traps, and a menacing cabal of hungry predators poised to
pounce on the weak and the unwary. Instinctively, they
remain attuned to the threats posed by those who are bigger,
stronger, or more ruthless than they are.