ARCH modeling in finance: A review of the theory and empirical evidence

Heteroskedasticity biases tests for contagion based on correlation coefficients. When contagion is defined as a significant increase in market comovement after a shock to one country, previous work suggests contagion occurred during recent crises. This paper shows that correlation coefficients are conditional on market volatility. Under certain assumptions, it is possible to adjust for this bias. Using this adjustment, there was virtually no increase in unconditional correlation coefficients (i.e., no contagion) during the 1997 Asian crisis, 1994 Mexican devaluation, and 1987 U.S. market crash. There is a high level of market comovement in all periods, however, which we call interdependence.

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No Contagion, Only Interdependence: Measuring Stock Market Comovements

This paper examines stock market co-movements. It begins with a discussion of several conceptual issues involved in measuring these movements and how to test for contagion. Standard tests examine if cross-market correlation in stock market returns increase during a period of crisis. The measure of cross-market correlations central to this standard analysis, however, is biased. The unadjusted correlation coefficient is conditional on market movements over the time period under consideration, so that during a period of turmoil when stock market volatility increases, standard estimates of cross-market correlations will be biased upward. It is straightforward to adjust the correlation coefficient to correct for this bias. The remainder of the paper applies these concepts to test for stock market contagion during the 1997 East Asian crises, the 1994 Mexican peso collapse, and the 1987 U.S. stock market crash. In each of these cases, tests based on the unadjusted correlation coefficients find evidence of contagion in several countries, while tests based on the adjusted coefficients find virtually no contagion. This suggests that high market co-movements during these periods were a continuation of strong cross-market linkages. In other words, during these three crises there was no contagion, only interdependence.

No Contagion, Only Interdependence: Measuring Stock Market Co-Movements

Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. We fill this gap by first deriving an option model that allows volatility, interest rates and jumps to be stochastic. Using S&P 500 options, we examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant timeseries data, (2) out-of-sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance. IN THE LAST TWO DECADES, option pricing has witnessed an explosion of new

/pdf/empirical-performance-of-alternative-option-pricing-models-18wa1txytu.pdf

Empirical Performance of Alternative Option Pricing Models

This study surveys the literature examining the privatization of state-owned enterprises (SOEs) We review the history of privatization, the theoretical and empirical evidence on the relative performance of state owned and privately owned firms, the types of privatization, if and by how much privatization has improved the performance of former SOEs in non-transition and transition countries, how investors in privatizations have fared, and the impact of privatization on the development of capital markets and corporate governance. In most settings privatization "works" in that the firms become more efficient, more profitable, and financially healthier, and reward investors.

/pdf/from-state-to-market-a-survey-of-empirical-studies-on-54vi9aent6.pdf

From State to Market: A Survey of Empirical Studies on Privatization

We estimate and compare a variety of continuous-time models of the short-term riskless rate using the Generalized Method of Moments. We find that the most successful models in capturing the dynamics of the short-term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate. A number of well-known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility. We show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk.

https://www.ucm.es/data/cont/media/www/pag-41459/CKLS%20An%20empirical%20comparison.pdf

An Empirical Comparison of Alternative Models of the Short‐Term Interest Rate

https://www.nber.org/system/files/working_papers/w8538/w8538.pdf

Why are Foreign Firms Listed in the U.S. Worth More

Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis. THE GLOBALIZATION OF U.S. CAPITAL MARKETS has accelerated dramatically in the past decade. Increasing numbers of companies from overseas have chosen to either raise capital through global equity issues or prepare for future capital raising by way of cross-listings on U.S. exchanges. As of 1997, about 1,300 non-U.S. companies have listed their shares for trading on the New York Stock Exchange (NYSE), the American Exchange (AMEX), the National Association of Securities Dealers' Automation Quotation (Nasdaq) system, or

https://www.jstor.org/stable/pdfplus/222432.pdf

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

This article explores the fundamental factors that affect cross-country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts (ADRs) and a matched-sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broadbased market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations. STOCK RETURN CROSS-COUNTRY COVARIANCES play a key role in international finance. Changes in these covariances affect the volatility of portfolios and asset prices. As these covariances increase, one expects that: (a) fewer domestic risks are internationally diversifiable, so portfolio volatility increases; (b) the risk premium on the world market portfolio increases;1 (c) the cost of capital increases for individual firms; and, (d) the domestic version of the CAPM becomes increasingly inadequate.2 Despite the important economic consequences of changes in cross-country covariances, the determinants of the levels and dynamics of these covariances have been little studied from an academic

/pdf/why-do-markets-move-together-an-investigation-of-u-s-japan-18mhf3vel3.pdf

Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements

https://www.nber.org/system/files/working_papers/w10726/w10726.pdf

G. Andrew Karolyi

Papers

An Empirical Comparison of Alternative Models of the Short‐Term Interest Rate

Why are Foreign Firms Listed in the U.S. Worth More

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements

Why do countries matter so much for corporate governance