Andrew C. Szakmary

The predictive power of implied volatility: Evidence from 35 futures markets

Abstract Using data from 35 futures options markets from eight separate exchanges, we test how well the implied volatilities (IVs) embedded in option prices predict subsequently realized volatility (RV) in the underlying futures. We find that for this broad array of futures options, IV performs well in a relative sense. For a large majority of the commodities studied, the implieds outperform historical volatility (HV) as a predictor of the subsequently RV in the underlying futures prices over the remaining life of the option. Indeed, in most markets examined, regardless of whether it is modeled as a simple moving average or in a GARCH framework, HV contains no economically significant predictive information beyond what is already incorporated in IV. These findings add to previous research that has focused on currency and crude oil futures by extending the analysis into a very broad array of contracts and exchanges. Our results are consistent with the hypothesis that futures options markets in general, with their minimal trading frictions, are efficient.

Valuation of IPOs Using a Stochastic Frontier Approach: A Revisit

We examine the determinants of market value and underpricing for 1221 IPOs using a stochastic frontier model applied to the previously unexamined 1999-2010 period. We find that the book value of assets, the percentage of shares retained by the original owners of the firm, the commission rate and the reputational rankings of the underwriters are the most important determinants of firm value and underpricing. We estimate that the mean ex-ante underpricing is 39.7% which, while seemingly high, is consistent with unusually large first day returns in our sample period and our focus on emerging growth IPOs. However, we do not find a positive relation between our modelbased measure of ex-ante underpricing and first day aftermarket returns at the firm level.

Mean Aversion in Fixed Income Returns: Evidence and Implications for Long Horizon Investors

This study documents strong mean aversion in U.S. fixed income returns (but not stock returns) at 5-20 year horizons. These results are only slightly weaker for nominal returns than for real returns and prevail regardless of the period examined (1926-2011, 1951-2011, 1857-1925 or 1857-2011). I show that the presence of mean aversion, along with a historically sizable equity premium, dramatically increases the risk of holding fixed income securities for long horizon investors, to the point where they are often actually riskier than stocks in a downside-risk framework for investment horizons as short as ten years. These results are fairly robust to the use of nominal vs. real returns, different sample periods from which simulated returns are drawn and even to sizable reductions in the historical equity premium.