Why is Volatily Important?
Volatility is indispensable, and is central for pricing any asset within the financial market, from a single stock to the most complicated derivative. It is quite important when managing portfolios or in computing the risk or the corresponding hedging strategy, but the issue is that is not observable and it is heteroskedastic, it fluctuates through time, you should not assume a homoscedastic pattern, constant over time, because it will be a huge mistake when estimating. For that, enormous literature has put huge effort in trying to predict future volatility as accurately as possible, thus large number of sophisticated models has been created since the crucial study of Engle (1982), where he introduced the ARCH model. As financial variables are characterized for non linear dependence, the ARCH model captures that dependence because it allows for heteroskedasticity, precisely, it depends only on the latest lag. However, when the sample is considerably large, the ARCH model has not the ability to capture that dependence because it will need so many lags that the estimation turns too much complex. Instead, later on, Bollerslev (1986) introduced the GARCH model. The main advantage is that it is able to capture the memory of the volatility, that parameter is the beta allowing for large samples. The main issue is that is defined with symmetric response in volatility, in other words, it is only taking into account the magnitude of the shocks, rather than the sign, meaning that for the same magnitude, negative and positive shocks will have the same effect. This is known as leverage effect and large empirical evidence has shown that it is present in financial variables, although it is not so significant for exch...
... middle of paper ...
...e rates.
Although this performance is quite good, the GARCH model faces two problems that will appear when estimating. (1) Symmetric response to volatility, known as leverage effect, which is quite well solved with the use of other GARCH-type models more sophisticated, in this case they suggest the TGARH, although they notice that this effect is not too much significant in the case of exchange rates. (2) Constant volatility, they introduce the Component GARCH that enables the possibility to introduce time-varying volatility pattern through time, feature unfeasible with the estimation of a GARCH that only permit a mean reversion path.
Definitively, the conclusion is that the GARCH model beats the statistical ones for the majority of the exchanges rates, this finding is linked to the evidence reached by Andersen and Bollerslev (1998) and Andersen et al. (1999)
The Poole Model is a macroeconomic model where its main objective is to answer the discussion on whether monetary policy should be conducted using a money-supply rule or an interest-rate rule when managing the economy. In the Poole Model, the Central Bank’s objective is to minimize the loss function:
The free-market economy is based on supply and demand. The idea is that products will be manufactured and sold at adjusted levels such that a fair market price is maintained. In other words the selling price of an item will vary based on the demand and supply of that item, adjusting as economic conditions change. Advertising has a large effect on how the free-market functions. Alan Goldman, in an excerpt from Just Business (1983, found in Honest work by Ciulla, Martin and Solomon), justifies advertising in the free-market economy using four main arguments, that “it is consistent in a free- market economy”, ”it is not wasteful of economic resources”, “it provides certain indirect social benefits”, and it is “a valuable source of information” (Goldman, 1983, p.301). Goldman claims that for each one of these reasons there is a necessary and immediate need for advertising if our market economy is going to function properly and we will discuss his arguments below.
As the time goes by, the value and the prices of the product will changes base on the society and the temporal finance situation. People will have the chance to buy the same products in different prices in different period of time due to the changing situation of the society. To let the people purchase products in a fair price as well as they can earn profit at the same time, businesses will need to consider the impact to the prices of product that effected by society. In Linear Algebra in the Financial World, Barbara Swart (2001) uses the example of determine the price of the gold and the price changing in different period of time to tells about the relationship between Linear Algebra and the Financial World.
Despite the fact that recent reports have shown that the Chinese currency is currently facing descending pressures, it is, however, likely to improve in the future because of the enhanced terms of trade, current account surplus that is growing, and high net saving. Another reason that will make the Chinese RMB to do well in the future it is because the currency has solid fundamentals and the economy of the country is significantly increasing at a higher rate than the GDP rates. Due to the growing Chinese economy to being the second largest economy, the Chinese currency yuan has been acknowledged by the International Monetary Fund (IMF) as a major global
...phases. Fabozzi and Francis (1977) conducted a study testing the differential effect of bull and bear market conditions for 700 individual securities listed on the NYSE. It was found that the estimated betas of most of the securities were stable in both market conditions. However, Ray (2010) conducted a similar study over a period of ten years using monthly returns of 30 stocks. The results obtained were both mixed and inconclusive. Bowie and Bradford (1997) found that the tests of beta stability are difficult to interpret on their own. Gombola and Kahl (1990) suggest that an OLS estimate of beta requires an estimation period during which the relationship between the market return and the stock return remain stable. However, without this stability, an alternative for forecasting a time-varying relationship such as the Bayesian adjustment process will be required.
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
Recently a new trend has taken up Wall Street. Savvy broker firms have realized that the market is probably controlled by some rules, and those rules have to be found to make more money with the least risk. They hired many mathematicians to look for any formulas that would seem to express the market. Those analyzed previous market trends and used laws of statistics to try to predict the “future” of the market. The funny thing is that at times this approach actually worked. It yielded a slightly more than fifty percent accuracy, and that was enough. (When dealing with tremendous amounts, even a small percentage is not meager.)
AutoEdge is facing crisis since millions of its automobiles has had to be recalled due to product quality issues. Many things should be considered in order to implement a proactive response to rectify the situation. As the research analysis, I have been tasked will helping to rebuild AutoEdge’s reputation as well as to reduce and control operating costs. When making any decision on implementing change within the organization market analysis must look at the market structure of the organization. Market structure is made up of the relationship that exists between buyers, sellers, competition, product differentiation, and ease of entry into and exit from the market. The article “Review of Market Structure” (n.d.) defines market structure as the “microeconomic characteristics of different markets” and include such elements as competition level, high versus low entry barriers, and scale (Review of Market Structure, n.d.) To make the decision the decision to relocate, AutoEdge must analysis and evaluate of market structure. This report will discuss the four different types of market structures: monopoly, oligopoly, monopolistic competition, and pure competition. Additionally, it will outline the type of market structure AutoEdge fits into, how that market structure impacts the level of competition, elasticity of demand, price, and position in the industry.
... while using the beta approach as a guide. Returns may also rely on general market swings, changes in interest rates and inflation, to changes in national income and other economic factors.
Frankel, J 1996, 'How Well Do Foreign Exchange Markets Work: Might a Tobin Tax Help?', The Tobin tax: Coping with financial volatility, pp. 41-81, n.p.: New York and Oxford: Oxford University Press.
This assignment is to address the issue of product marketing. Marketing is defined as the activity, set of institutions and processes for creativity, communicating, delivery and exchanging offerings that have value for customers. It has become crucial to success in our modern competitive economic. Volterman wallet was created and introduced recently to the world market to overcome the loss of wallet which has become a common problem. To enhance its popularity, the Volterman wallet has been positioned and hope to be market and managed strategically to attract its targeted market segmentation which is believed to be able to produce the market internationally.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
For commodity price, the demand and supply are directly contributing to the price volatility. The changes in interest rates and exchange rates are significant influence for commodity output and it also has impact on the commodity prices (Dornbusch 1976). For example, based on the equation of AD=C+I+G+NX. If the government expenditure increases, it will tend to
Financial theories are the building blocks of today's corporate world. "The basic building blocks of finance theory lay the foundation for many modern tools used in areas such asset pricing and investment. Many of these theoretical concepts such as general equilibrium analysis, information economics and theory of contracts are firmly rooted in classical Microeconomics" (Oaktree, 2005)
The Dow Theory had laid down the basic principles of technical analysis. However, with the advent of more advanced techniques and tools the Dow Theory needs some expansion. One of the big problems with the theory is that the conservative nature of a trend-reversal signal. A reversal in the bullish and bearish trend is confirmed when there is an end to successive highs and successive lows respectively. However, it is difficult to predict the end of trends and by the time it gets confirmed the markets have already moved a long way.