Volatility forecasting is crucial for option pricing, risk management and
portfolio management. Nowadays, volatility has become the subject of
trading. There are now exchange-traded contracts written on volatility.
Financial market volatility also has a wider impact on financial regulation,
monetary policy and macroeconomy.
They exhibit the profile characteristic of being credit constrained
with spending out of current income, while simultaneously choosing a “flat” profile for
credit card spending over the pay period. This behavior suggests of the use of a mental
account rule, and thus provides some indication that households in our sample are
sophisticated, and able to use internal commitments to limit overspending.
In summary, the two main stylized facts generated by this paper are difficult to
explain in the standard economic framework.
Preliminary analysis of the data reveals some noteworthy similarities and differences between
Chile and the other countries considered. Over this sample period, Chilean interest rates are on
average higher, more volatile, and less persistent than the interest rates for the other countries.
However, in Chile, the degree of co-movement between retail bank interest rates and the money
market rate is essentially the same as in other countries.
Our notion of what triggers a boom-bust cycle is very stylized: the signal occurs
on a particular date and people learn that it is exactly false on another particular
date. In more realistic scenarios, people form expectations based on an accumulation
of various signals. If people’s expectations are in fact overoptimistic, they come to
this realization only slowly and over time.