Ángel León

Measurement of formal harmonization progress:: The IASC experience

Abstract As a result of globalization, the accounting profession has become increasingly aware of the need to establish a single set of accounting standards that would be valid in the international arena. Recent events highlight the timeliness of this study, which provides an empirical measurement of International Accounting Standards Committee (IASC) progress throughout its harmonization history. The purpose of this article is twofold: first, a new measure of the advances achieved through formal harmonization and second, to use this methodology to evaluate the IASC achievements all through its standard-setting activity. Our results prove that the IASC has made great progress in regard to the level of harmony achieved through the accounting standards it has issued or revised. Nevertheless, we conclude that the IASC needs to continue working towards greater formal harmonization. Our study also indicates research directions that could advance the study of formal harmonization. This specific area of research has generally been disregarded in the existing literature, a trend we would like to see reversed, considering that its application can provide valuable insight for standard-setting processes, especially now that the accounting community is so conscious of the need to advance the harmonization process.

Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation

We derive the statistical properties of the SNP densities of Gallant and Nychka (1987). We show that these densities, which are always positive, are more general than the truncated Gram-Charlier expansions of Jondeau and Rochinger (2001), who impose parameter restrictions to ensure positivity. We also use the SNP densities for option valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and study the ?Greeks?. We show that SNP densities generate wider option price ranges than the truncated expansions. In an empirical application to S&P 500 index options, we find that the SNP model beats the standard and Practitioner?s Black-Scholes formulas, and truncated expansions.

Estimation and empirical performance of Heston's stochastic volatility model: the case of a thinly traded market

Abstract This paper examines the stochastic volatility model suggested by Heston [Rev. Financ. Stud. 6 (1993) 327] in a thinly traded market context. We employ a time-series approach based on indirect inference to estimate the model parameters. We also discuss the potential effects of time-varying skewness and kurtosis on the performance of the model. It is found that the model tends to overprice out-of-the-money calls and underprice in-the-money calls. Moreover, the daily volatility risk premium shows a volatile behavior over time; however, our evidence suggests that the volatility risk premium has a negligible impact on the pricing performance of Hestons model.

The relationship between risk and expected return in Europe

En este trabajo empleamos MIDAS (Muestreo Mixto de Datos) para estudiar la relacion entre riesgo y rendimiento esperado en varios indices bursatiles europeos. Cuando se utiliza MIDAS mostramos que, para la mayoria de los indices, existe una relacion positiva y significativa entre riesgo y rendimiento esperado. Este resultado contrasta llamativamente con los resultados que obtenemos cuando empleamos modelos GARCH de la varianza condicional tanto en su version simetrica como asimetrica. Asimismo, encontramos que versiones asimetricas dentro del contexto MIDAS mejoran la relacion entre riesgo y rendimiento esperado. Finalmente, introducimos el marco MIDAS bi-variante y mostramos cierta evidencia favorable al componente de cobertura en la relacion intertemporal entre riesgo y rendimiento.

New measures of monetary policy surprises and jumps in interest rates

We propose new surprise measures to characterise two important dimensions of monetary policy. Our measures outperform the traditional monetary shocks in explaining variation of interest rates in the event-study framework. We also study the extent to which the ECB caused jumps in euro area interest rates. The new surprises still prevail upon the traditional ones. Jumps play a great role in the variation of interest rates and the ECB induced several jumps with its decisions, but its predictability has improved over time. We find that, although the surprise measures become somewhat distorted due to money market tensions during the financial turmoil, our model still provides an interesting insight into interest rate behaviour throughout the crisis.

A note on adjusting correlation matrices

A new algorithm for adjusting correlation matrices and for comparison with Fingers algorithm, which is used to compute Value-at-Risk in RiskMetrics for stress test scenarios. The solution proposed by the new methodology is always better than Fingers approach in the sense that it alters as little as possible those correlations that one would wish not to alter, but they change in order to obtain a consistent Finger correlation matrix.

Does Stock Return Predictability Affect ESO Fair Value

Executive Stock Options (ESOs) are modified American options that cannot be valued using standard methods. With a few exceptions, the literature has discussed the ESO fair value by assuming unpredictable stock returns which are not supported by the available empirical evidence. In this paper we obtain the fair value of American ESOs when stock returns are predictable and, specifically, driven by the trending Ornstein–Uhlenbeck process of Lo and Wang (1995). We solve the executive’s portfolio allocation problem for a simple buy-and-hold strategy when his wealth can be distributed between a risk-free asset and a market portfolio. This problem is jointly solved with the executive’s optimal exercise policy. We find that executives tend to wait longer the higher the predictability, independently of the composition of executive’s asset menu. We have also analyzed the implications under the FAS123R proposals for the ESO fair value and found that, even for low autocorrelations, there is a meaningful mispricing when unpredictable returns are erroneously assumed.

Screening Rules and Portfolio Performance

We analyze the use of alternative performance measures to rank and select assets. Previous literature centers on the effects of non-normality on rank correlations between orderings. Instead, we select the assets recommended by each performance measure (ordering) and analyze out-of-sample returns of the portfolio that contains them. The overall empirical findings show that performance measures are definitively relevant for subsequent portfolio returns. Assets selected by the Generalized Rachev ratio dominate other selections showing high cumulative returns after the 2008 downturn. The good performance is connected to the fact that these asset returns show high excess kurtosis but positive skewness and are insensitive to the momentum risk factor.