Four Essays on the Empirical Properties of Stock Market Volatility

Transcription

1 Four Essays on the Empirical Properties of Stock Market Volatility Thesis Presented to the Faculty of Economics and Social Sciences of the University of Fribourg (Switzerland) in fulfillment of the requirements for the degree of Doctor of Economics and Social Sciences by Philippe Masset From Bussy (Fribourg, Switzerland) Accepted by the Faculty's Council on 23 April 2012 at the proposal of Professor Martin Wallmeier (First supervisor) and Professor Dusan Isakov (Second supervisor) A Fribourg (Switzerland) 2012

2 Contents Contents List of Figures II VII List of Tables ' X List of abbreviations Notation XIII XVI 1 Introduction Purpose of the dissertation On the importance of risk in finance A quick primer on volatility and risk Structure and content of the dissertation 14 2 Volatility Stylized Facts Introduction.. } Data Dataset Bull and Bear markets: Identification of turning points 24 II

3 CONTENTS - III Computation of returns and volatility Descriptive statistics Clustering and long-memory Mean-reversion and clustering A simple autoregressive model for volatility GARCH modelling of volatility.-' Long memory ,. What does "long memory" mean? How to estimate the fractional differencing parameter? Estimation of the fractional differencing parameter for the 34 market indices Extreme environments Preliminary and descriptive statistics Estimation of the tail index Theoretical considerations Estimates of the tail index for the 34 indices Shocks and aftershocks Omori law Results and discussion Robustness checks Leverage effect or asymmetric volatility phenomenon Brief literature review ' 103

4 CONTENTS IV Empirical analysis Information content of volatility at different time scales Heterogeneous volatility and heterogeneous market Empirical analysis Conclusion Analysis of Financial Time-Series using Fourier "and Wavelet Methods Introduction Frequency-domain analysis Spectral analysis: some basics and an example Filtering methods Scale-by-scale decomposition with wavelets Theoretical background Implementation and practical issues Illustration: Home price indices for different US-cities Conclusion A High-Frequency Investigation of the Interaction between Volatility and DAX Returns Introduction Data ' Raw returns and the smile in option prices This chapter is identical to the article that has been published in European Financial Management: Masset, P. / Wallmeier, M. (2010), A high-frequency investigation of the interaction between volatility and DAX returns, European Financial Management 16(3), pp

5 CONTENTS ; V Microstructure frictions Descriptive return statistics Correlation analysis Contemporaneous correlation and asymmetry Correlation with lagged returns Causality analysis " Granger causality test Contemporaneous versus lagged relationship Impulse-response functions Effect of liquidity and net buying pressure Conclusion Intraday Patterns, Jumps and their Impact on Subsequent Volatility Introduction * Data Computation of DAX and implied volatility levels High-frequency frictions Estimation of the intraday patterns and jump identification Methodology for estimating intraday patterns Realized variance and identification of jumps Intraday volatility patterns Intraday patterns for squared returns... ' 208

6 CONTENTS " VI Intraday patterns for implied volatility Price discontinuities Number and importance of jumps Timing of jumps Impact of a jump on volatility Impact on absolute returns and implied volatility Impact on realized volatility Conclusion..' Conclusion Summary of the dissertation Implication of our results for volatility modelling 224 A GARCH modelling of volatility, 228 Bibliography 231