Behavioral analysis of long-term implied volatilities

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Min Xu ◽  
Hong Xie ◽  
Yuehua Wu
Keyword(s):  
Interest Rate ◽  
Implied Volatility ◽  
Market Risk ◽  
Interest Rate Risk ◽  
Risk Capital ◽  
Time Segment ◽  
Underlying Asset ◽  
Content Type ◽  
Rate Risk

Purpose The purpose of this paper is to analyze different behaviors between long-term options’ implied volatilities and realized volatilities. Design/methodology/approach This paper uses a widely adopted short interest rate model that describes a stochastic process of the short interest rate to capture interest rate risk. Price a long-term option by a system of two stochastic processes to capture both underlying asset and interest rate volatilities. Model capital charges according to the Basel III regulatory specified approach. S&P 500 index and relevant data are used to illustrate how the proposed model works. Coup with the low interest rate scenario by first choosing an optimal time segment obtained by a multiple change-point detection method, and then using the data from the chosen time segment to estimate the CIR model parameters, and finally obtaining the final option price by incorporating the capital charge costs. Findings Monotonic increase in long-term option implied volatility can be explained mainly by interest rate risk, and the level of implied volatility can be explained by various valuation adjustments, particularly risk capital costs, which differ from existing published literatures that typically explained the differences in behaviors of long-term implied volatilities by the volatility of volatility or risk premium. The empirical results well explain long-term volatility behaviors. Research limitations/implications The authors only consider the market risk capital in this paper for demonstration purpose. Dealers may price the long-term options with the credit risk. It appears that other than the market risks such as underlying asset volatility and interest rate volatility, the market risk capital is a main nonmarket risk factor that significantly affects the long-term option prices. Practical implications Analysis helps readers and/or users of long-term options to understand why long-term option implied equity volatilities are much higher than observed. The framework offered in the paper provides some guidance if one would like to check if a long-term option is priced reasonable. Originality/value It is the first time to analyze mathematically long-term options’ volatility behavior in comparison with historically observed volatility.

scholarly journals Analisis Perbandingan Kinerja Keuangan Perbankan Syariah Bank Umum Syariah (BUS) dengan Unit Usaha Syariah (UUS) pada Bank Umum Konvensional

2015 ◽  
Vol 6 (1) ◽  
pp. 81
Author(s):  
Wiwin Kurniasari
Keyword(s):  
Interest Rate ◽  
Risk Ratio ◽  
Asset Management ◽  
Market Risk ◽  
Interest Rate Risk ◽  
Capital Adequacy ◽  
Business Unit ◽  
Capital Asset ◽  
Rate Risk ◽  
Capital Adequacy Ratio

This study aims to analyze the comparative financial performance of Islamic Banking with Conventional Banking (Shariah Business Unit) for each financial ratio and overall. The measurements of banking performance were used in this study are CAMELS ratios (Capital, Asset, Management, Earnings, Liquidity, and Sensitivity to Market Risk). This study uses 11 Shariah Banks and 12 Shariah Business Unit in 2012. This study shows that there are no differences between Shariah Banks and Shariah Business Unit in Capital Adequacy Ratio and Ratio Quality of Earning Asset, but there are differences in Management Ratio, Profitability Ratio, Liquidity Ratio, and Sensitivity Ratio in each and overall.Penelitian ini bertujuan untuk menganalisa perbandingan kinerja keuanganperbankan syariah yaitu Bank Umum Syari ah (BUS) dengan Bank Konvensional dari Unit Usaha Syariah (UUS) untuk masing-masing rasio keuangan dan secara keseluruhan. Ukuran kinerja bank yang digunakan dalam penelitian ini adalah rasio keuangan bank CAMELS (Capital, Asset, Management, Earnings, Liquidity, sensitivity to market risk), yang meliputi Capital Adequacy Ratio (mewakili rasio permodalan), pembentukan penyisihan penghapusan aktiva produktif (mewakili rasio kualitas aktiva produktif), Net Profit Margin/NPM(mewakili rasio manajemen), Return on Assets (ROA), Loan to Deposit Ratio (mewakili rasio likuiditas) dan Interest Rate Risk Ratio (mewakili rasio Sensitivitas terhadap Risiko Pasar).Teknik pengambilan sampel yang digunakan dalam penelitian ini adalah purposive sampling yang merupakan teknik pengambilan sampel dengan pertimbangan atau kriteria tertentu. Sampel yang dipergunakan peneliti adalah11 Bank Umum Syariah (BUS) dan 12 Unit Usaha Syariah (UUS) yang memiliki kelengkapan laporan keuangan tahun 2012 yang berupa neraca, laporan laba rugi, komitmen dan kontinjensi, kualitas aktiva produktif dan informasi lainnya, perhitungan kewajiban penyediaan modal minimum (KPMM). Berdasarkan hasil penelitian, analisis uji beda rata-rata t-Test memperlihatkan tidak ada perbedaan yang signifikan antara kinerja keuangan perbankan syariah pada Bank Umum Syariah (BUS) dengan perbankan konvensional yang mempunyai Unit Usaha Syariah (UUS) jika dilihat dari rasio permodalan (CAR) dan rasio kualitas aktiva produktif (PPAP). Ada perbedaan yang signifikan antara kinerja keuangan perbankan syariah (Bank Umum Syariah) dengan perbankan konvensional yang mempunyai Unit Usaha Syariah (UUS) jika dilihat dari rasio manajemen (NPM), rasio profitabilitas (ROA), rasio likuiditas (LDR), dan rasio sensitifitas terhadap reaksi pasar-Interest Rate Risk Ratio (IRRR), serta jika dilakukan analisis secara keseluruhan kinerja keuangan perbankan syariah.

Synthesis and Conclusion

2019 ◽  
pp. 443-458
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Civil War ◽  
Interest Rate ◽  
Liquidity Risk ◽  
Market Risk ◽  
Interest Rate Risk ◽  
Securities And Exchange Commission ◽  
Confederate States Of America ◽  
Rate Risk ◽  
National Bank

This chapter begins with a synthesis of key themes, covering derivatives, debt instruments, and structured notes. It considers the case study Securities and Exchange Commission v. Goldman, Sachs & Co. & Fabrice Tourre. It then describes the Erlanger “cotton” bonds issued by the Confederate States of America to raise money during the Civil War. This is followed by discussions on range notes, internal leverage and market risk, and risks (interest rate risk, liquidity risk, reinvestment risk). The chapter concludes by describing the bulletin issued by the Office of the Comptroller of the Currency on May 22, 2002, to all national bank CEOs and all federal branches and agencies in regard to risky “yield-chasing” strategies that were returning to the markets.

scholarly journals Riding the Yield Curve

2020 ◽  
Vol 20 (53) ◽  
Author(s):  
Ralph Chami ◽  
Thomas Cosimano ◽  
Celine Rochon ◽  
Julieta Yung
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Risk Taking ◽  
Yield Curve ◽  
Interest Rate Risk ◽  
Risk Capital ◽  
Hedging Strategies ◽  
Rate Risk ◽  
Rate Environment ◽  
Changes In Risk

Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.

Varying interest rate sensitivity of different property sectors: cross-country evidence from REITs

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yu-Cheng Lin ◽  
Chyi Lin Lee ◽  
Graeme Newell
Keyword(s):  
Interest Rate ◽  
Rate Sensitivity ◽  
Interest Rate Risk ◽  
Pacific Rim ◽  
Content Type ◽  
Rate Risk ◽  
The Pacific ◽  
The Usa ◽  
Short And Long Term ◽  
The Interest Rate

PurposeRecognising that different property sectors have distinct risk-return characteristics, this paper assesses whether changes in the level and volatility of short- and long-term interest rates differentially affected excess returns of sector-specific Real Estate Investment Trusts (REITs) in the Pacific Rim region between July 2006 and December 2018. The strategic property risk management implications for sector-specific REITs are also identified.Design/methodology/approachDaily excess returns between July 2006 and December 2018 are used to analyse the sensitivity in the level and volatility of interest rates for REITs among office, retail, industrial, residential and specialty REITs across the USA, Japan, Australia and Singapore. The generalised autoregressive conditionally heteroskedastic in the mean (GARCH-M) methodology is employed to assess the linkage between interest rates and excess returns of sector-specific REITs.FindingsCompared with diversified REITs, sector-specific REITs were less sensitive to short- and long-term interest rate changes across the USA, Japan, Australia and Singapore between July 2006 and December 2018. Of sector-specific REITs, retail and residential REITs were susceptible to interest rate movements over the full study period. On the other hand, office and specialty REITs were generally less sensitive to changes in the level and volatility of short- and long-term interest rate series across all markets in the Pacific Rim region. However, the interest rate sensitivity of industrial REITs was somewhat mixed. This sector was sensitive to interest rate movements, but no comparable evidence was found since the onset of GFC.Practical implicationsThe insignificant exposure to interest rate risk of sector-specific REITs may imply that they have a stronger interest rate risk aversion and greater hedging benefits than their diversified counterparts, particularly for office and specialty REITs. The results support the existence of REIT specialisation value in the Pacific Rim region from the interest rate risk management perspective. This is particularly valuable to international property investors constructing and managing portfolios with REITs in the region. Property investors are advised to be aware of the disparities in the magnitude and direction of sensitivity to the interest rate level and volatility of REITs across different property sectors and various markets in the Pacific Rim region. This study is expected to enhance property investors' understanding of interest rate risk management for different property types of REITs in local, regional and international investment portfolios.Originality/valueThe study is the first to assess the interest rate sensitivity of REITs across different property sectors and various markets in the Pacific Rim region. More importantly, this is the first paper to offer empirical evidence on the existence of specialisation value in the Pacific Rim REIT markets from the aspect of interest rate sensitivity. This research may enhance property investors' understanding of the varying interest rate sensitivity of different property types of REITs across the USA, Japan, Australia and Singapore.

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