Steven Freund

Volatility Estimation for Stock Index Options: A GARCH Approach

The objective of this paper is to compare the mispricing of option valuation models when alternate techniques are applied to the volatility estimation. Akgiray (1989) shows that out-of-sample forecasts of return variances of stock indices based on a GARCH model are superior predictors of the actual ex-post variances in comparison to forecasts generated using standard rolling regression methods. A second objective of this study is to examine if Akgirays results carry over to option valuation. Although we find that the implied volatility technique results in the least mispricing, within the class of forecasts using only historic returns data, the use of GARCH models will also significantly reduce model mispricing.

Operating Performance and Free Cash Flow of Asset Buyers

We examine a sample of 552 firms that announce asset purchases. We find that the announcement period returns are negatively related to the amount of free cash flow for buyers with fewer growth opportunities. Compared to the year prior to the purchase, the mean long-run operating performance of asset buyers worsens in each of the three years following the transaction. Operating performance changes are negatively related to the amount of free cash flow, and the relationship is stronger for buyers with fewer growth opportunities. We also find that buyer firms experience a decline in the return on assets and asset turnover ratios. These findings are consistent with Jensen’s (1986) free cash flow theory.

A data analytic approach to forecasting daily stock returns in an emerging market

Forecasting stock market returns is a challenging task due to the complex nature of the data. This study develops a generic methodology to predict daily stock price movements by deploying and integrating three data analytical prediction models: adaptive neuro-fuzzy inference systems, artificial neural networks, and support vector machines. The proposed approach is tested on the Borsa Istanbul BIST 100 Index over an 8 year period from 2007 to 2014, using accuracy, sensitivity, and specificity as metrics to evaluate each model. Using a ten-fold stratified cross-validation to minimize the bias of random sampling, this study demonstrates that the support vector machine outperforms the other models. For all three predictive models, accuracy in predicting down movements in the index outweighs accuracy in predicting the up movements. The study yields more accurate forecasts with fewer input factors compared to prior studies of forecasts for securities trading on Borsa Istanbul. This efficient yet also effective data analytic approach can easily be applied to other emerging market stock return series.

A Regression Analysis of the Effects of Options Introduction on Stock Variances

We recruited 275 full term and preterm infants into a prospective evaluation of continuous four channel electroencephalographic (EEG) monitoring in the diagnosis and prognosis of neonatal seizures. EEG seizure activity was found in 55 infants; clinical signs were completely simultaneous in only 12 of these, they were present but limited in another 20, and were completely absent in the remaining 23. EEG seizure activity, with or without clinical signs, were equally associated with serious cerebral lesions and with adverse clinical outcome. The four channel EEG recording provided sufficient data on abnormality to be prognostically specific in 79% of the 43 infants who either died or had serious neurological impairment.

The pricing of convexity risk and timedecay in options markets

Abstract Option valuation formulas typically assume all risk can be eliminated in a continuously rebalanced hedge, but convexity of the option pricing function and time decay cause risk in real world hedges. We find strong evidence in stock options transactions data from periods 10 years apart that the market prices these risks. There is a significant price effect associated with convexity, that becomes larger immediately following a period of larger stock price movements. Although time decay is highly correlated with convexity, a multiple regression including both factors shows it to have a significant independent effect. The results from the two sample periods are highly consistent, as are pre- and post-Crash results from the year 1987.