Valentina Galvani

A note on spanning with options

Abstract This note investigates the spanning power of ordinary options in spaces of contingent claims defined over uncountable many states of nature. It is proved that options might complete the space of Borel measurable and p -integrable contingent claims as well as the space of Borel measurable payoffs defined over a compact space. This work also shows that options fail to complete the space of continuous claims defined over a completely regular noncompact state-space but might complete the space of Borel measurable and p -integrable contingent claims and the larger space of Borel measurable payoffs.

Momentum and Market Instability

This paper establishes a strong link between the profitability of the momentum strategy and market instability, as gauged by flight-to-quality episodes. Momentum gains are shown to be roughly ten times larger during flight episodes. Further, flights are significantly associated with larger momentum profits even after controlling for indicators of asset performance, volatility, illiquidity, market state, and monetary policy. This papers results also show that illiquidity shocks appear to diversely affect different types of flights, as predicted in Vayanos (2004). Finally, monetary policy announcements, past and contemporaneous, are shown to decrease the incidence of market instability.

Flights from Stocks

This paper examines the role of asset performance, volatility, illiquidity, and monetary policy on flight-to-quality episodes. We consider flights from stocks into long and short-term Treasuries, and Moodys AAA corporate bonds. Flights are shown to be associated with stock market volatility. Illiquidity appears to have a differential effect on different types of flights, as predicted by the asset pricing model with illiquidity by Vayanos (2004).Monetary policy, lagged and contemporaneous, is shown to decrease flight incidence. Our work also links market instability with the effects of overconfidence, as measured by the profitability of the momentum strategy.