Decline In Volatility Research Articles

High Price Impact Trade Identification and Its Implication for Volatility and Price Efficiency

We include limit order book (LOB) matchedness as a new trade attribute to identify high price impact trades (HPITs). HPITs are trades associated with large price changes relative to their volume proportion. We show that the inclusion of matchedness provides a finer analysis of the relationship between price contribution and trade categories. We further verify that a stronger presence of HPITs leads to a decline in volatility and improves price efficiency, which suggests a link between HPITs and informed trades.

Analyzing the Impact of Monetory Policy Shocks on Output, Inflation and Exchange Rate Dynamics of Pakistan

The major objective of this study is to analyse that how monetary policy of Pakistan had impact on output, inflation and exchange rate fluctuations during Global Financial Crisis 2008-2009 in Pakistan. Quarterly data was used for this purpose. Data spans from 1990Q1 to 2022Q4. Time varying parameter – vector auto regression model (TVP-VAR) of Jouchi Nakajima (2011) has been used for analysis. Through this model we selected the time horizons such as 2008, 2009 and 2015 mainly to study the impact of monetary policy on different selected variables. Our empirical finding indicates that monetary policy shock plays an important role in the economic dynamics of Pakistan. The impulse response of inflation is negative to tight monetary policy shock (εi↑→ p), this is in accordance with the standard economic theory. In case of Pakistan, after 1990 there is declining trend in volatility of output and a considerable reduction in business cycle fluctuations. Policy rate is more volatile during 1998. After 2000 there is decline in volatility of policy rate but in 2008-09 there is rise in interest rate because of Global Financial Crises in 2007 and 2008. The response of policy rate to inflation shock is in rising trend in 2007 and 2008. The inflation is increasing as a response to positive output shocks after 12th quarter this rising trend is also evident during 2008 where the impact of output on inflation is long term.

Africa's Great Moderation

Abstract Over the past 30 years, African economies have experienced remarkable improvements in macroeconomic conditions, characterised by higher and more stable real per-capita growth rates and lower and more stable inflation. This paper documents the persistent decline in macroeconomic volatility at the aggregate and sectoral levels and seeks to provide explanations. Sectoral analysis shows a particularly strong reduction of growth volatility in agriculture and, to a lesser extent, in services. Classical structural change only explains a small fraction of the moderation. Analysis of further factors yields that changes in structural characteristics such as institutions, trade intensity and diversification, natural resource dependence or conflict incidence do not explain the moderation. On the positive side, the paper provides evidence to suggest that changes in the external environment, improved macroeconomic policy frameworks and ‘softer’ structural improvements, such as the deepening of the domestic financial sector, were important in reducing macroeconomic volatility on the continent.

Трансмісійний механізм монетарної політики в контексті забезпечення макроекономічної стабільності

Introduction. In 2020, the COVID-19 pandemic quickly spread to almost all countries, causing a downturn in the economy and worsening monetary stability. In terms of the scale of its effects, this stress even exceeded the impact of the global financial crisis. It was quite logical to revise the parameters of monetary policy, including lowering (or keeping low) key policy rates, accepting long-term refinancing operations, and reducing the required reserve ratio. All of these measures were intended to stimulate the economy, and the recent practice deserves an examination of how effective the transmission of monetary policy has been. Problem Statement. The implementation of monetary policy in the context of the pandemic is giving rise to new academic discussions about transmission channels, as well as the combination of the general and the particular in the context of countries. The purpose is to examine the transmission mechanism of monetary transmission to achieve the inflation target and ensure sustainable economic growth of the national economy. Methods. General scientific and specific methods of scientific cognition were used. In particular, the study used system analysis to describe models of the monetary policy transmission mechanism; abstract and logical analysis to summarize and build logical links between individual links in the monetary policy transmission mechanism; and statistical and economic analysis to analyze the impact of monetary transmission on inflation under the inflation targeting regime. Methods. System analysis was used to describe models of the transmission mechanism of monetary policy; abstract-logical – for summarizing and building logical connections between separate links of the transmission mechanism of monetary policy; statistical and economic - to analyze the impact of monetary transmission on inflation within the framework of the inflation targeting (IT) regime. Results. Transmission channels are defined as the chain of transmission of the impact from the key policy rate (discount rate) to the next link in the monetary transmission chain. Because of its properties (systematicity, consistency, and microfoundedness), neo-Keynesian logic is well suited to the main macroeconomic models that belong to the class of structural models (including both classical DSGE and semi-structural models). The model used by the National Bank of Ukraine to describe the transmission and build a medium-term forecast of the domestic economy also belongs to the class of structural models. A structural model in the neo-Keynesian logic combines the three most powerful transmission channels - interest rate, exchange rate, and expectations channels. An impulse in the key policy rate is instantly reflected in the 10-day interbank lending rate, and this rate is therefore the NBU's operational target for monetary policy. From the interbank lending rate, the impact of monetary policy is transmitted further to rates in other segments of the money market. Changes in interest rates affect the consumption and investment decisions of economic agents. From market interest rates and financial asset yields, the monetary policy impulse spreads further to lending activity and balance sheet indicators of companies and banks. Changes in the key policy rate affect prices and the value of assets on companies' balance sheets. From the credit sector, the impulse is smoothly transferred to economic activity and inflation. Aggregate demand, expectations, the exchange rate, and producer costs respond to monetary policy. Monetary policy affects expectations and, consequently, inflation by creating an “anchor” for its expected level in the medium term. Conclusions. Achieving the inflation target through the use of the IT regime is an important condition for achieving macroeconomic stability. The NBU's transition to IT was justified, as evidenced by the proven hypothesis of a sharp decline in inflation and price volatility in the medium term. Prices stabilized through the expectations channel. A timely response to the challenges of the pandemic should be accompanied by an easing of monetary policy aimed at reducing the cost of financial resources and restoring long-term lending to the economy. The experience gained enabled the banking system to withstand the next shock - a full-scale Russian aggression against Ukraine, using proven approaches. Studies have shown that the inflation target of 5% ± 1 p.p., which is optimal from the NBU's point of view, does not affect economic growth. The use of the key policy rate instrument demonstrates a delayed reaction of market participants with a lag of 9-18 months. The regulator focuses on the inflation target and, once it is achieved, on measures to support inflation within the planned target. Resolving the dilemma between the planned inflation rates and maintaining economic growth requires regulatory changes to the laws governing the central bank.

The conditional impact of market conditions, volatility and liquidity shocks on the arbitrage opportunities during pre‐COVID and COVID periods

AbstractThe study examines the effects of market conditions, volatility and liquidity shocks on the arbitrage profits during pre‐COVID and COVID periods. The study uses a conditional quantile regression and finds no significant difference in the impact of market conditions on the arbitrage profits during pre‐COVID and COVID crisis periods. The increase in volatility combined with low liquidity during the COVID period makes arbitrage non‐viable. However, the decline in volatility during the COVID period encourages investors to initiate arbitrage. The results are useful to fund managers and market analysts to develop suitable trading strategies and stock market regulators to take necessary steps to improve price discovery mechanisms and market efficiency.

Evaluation of Agricultural Eco-Efficiency and Its Spatiotemporal Differentiation in China, Considering Green Water Consumption and Carbon Emissions Based on Undesired Dynamic SBM-DEA

Both agricultural output and environmental pollution in China show certain characteristics of spatiotemporal variation due to the evolution and inter-provincial disparities of resource endowment, economic development level, and production mode. This paper considered the green water consumption, carbon emissions in agricultural production, and the persistent role of fixed asset investment, constructed an undesired dynamic SBM-DEA model, and evaluated the agricultural eco-efficiency (AEE) of 31 provinces in China from 2007 to 2018, analyzing the spatiotemporal differentiation. The results show that, during 2007–2018, the following can be concluded: (1) The AEE of 31 provinces in China showed the characteristics of an overall stable rise from 0.64 to 0.70 but uneven development among regions from 2007 to 2018. (2) The averages of either the agricultural resource consumption efficiency index or pollution emission efficiency index in 31 provinces slightly increased over time, while the average value of the agricultural fixed asset investment efficiency index showed a decline in volatility. The spatial discrepancy of any index mainly stems from the index disparity between groups with a high AEE and groups with a low one, with contribution rates of more than 85%. (3) It is recommended to emphasize strengthening communication and cooperation between provinces with high and low AEE and implement distinct regional strategies to improve AEE.

Reduced macroeconomic volatility after adoption of inflation targeting: Impulses or propagation?

This paper asks whether the notable decline in macroeconomic volatility after countries adopted inflation targeting can be attributed to a more stable structure (the propagation mechanism) or less volatile shocks (the impulses). Using quarterly data from a sample of advanced and emerging market economies, results show that the observed reduction in inflation variability may be attributed largely to a more stable structure while the decreased output volatility is driven solely by much calmer shocks. The result is robust to various specifications examined.

Misperceptions of Bitcoin Volatility

Bitcoin market capitalization recently surpassed $1 trillion. While popular belief holds that a key characteristic of bitcoin is its excessive volatility, this article provides evidence that this is largely a misperception. We show that bitcoin return fluctuations are lower than those of roughly 900 stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks, including Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, the volatility of bitcoin was lower than that of most of these asset classes. The significant decline in bitcoin volatility over the past decade renders it more investable for conservative investors.

Can the Market Multiply and Divide? Non‐Proportional Thinking in Financial Markets

ABSTRACTWe hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower‐priced stocks. Consistent with such non‐proportional thinking, we find a doubling in price is associated with a 20% to 30% decline in volatility and beta (controlling for size/liquidity). To identify a causal price effect, we show that volatility jumps following stock splits and drops following reverse splits. Lower‐priced stocks also respond more strongly to firm‐specific news. Non‐proportional thinking helps explain asset pricing patterns such as the size‐volatility/beta relation, the leverage effect puzzle, and return drift and reversals.

Rethinking Exchange Rate Regimes

This paper employs an updated algorithm and database for classifying exchange rate and anchor currency choice, to explore the evolution of the global exchange rate system, including parallel rates, capital controls and reserves. In line with a large recent literature, we find that the dollar has become ever-more central as the de facto anchor or reference currencies for much of the world. Our discussion encompasses the history of anchor currency choice, methods for classifying exchange rate regimes, a detailed discussion of the evolution of regimes, the growing substitution of reserves for capital controls as a tool for exchange rate stabilization, the modern Triffin dilemma, and the surprising recent trend decline in volatility of exchange rates at the core of the system. It concludes with issues surrounding the rise of China.

Disappearing Volatility of Bitcoin

Bitcoin market capitalization has recently surpassed $1 trillion. According to the popular belief one of the key characteristics of bitcoin is its excessive volatility. This paper provides evidence that high volatility of bitcoin is largely a misperception. We show that bitcoin return fluctuations are lower than those of roughly 900 different stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks: Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, bitcoin volatility was lower than most of the above-mentioned asset classes. Significant decline in bitcoin volatility over the last decade renders it more “investable” by conservative investors.

Transformations of Biomass, Its Derivatives, and Downstream Chemicals over Ceria Catalysts

In the past two decades, on account of the energy and environmental crisis brought by the decline in fossil resources, price volatility, and climate change, the high-value utilization of biomass fe...

Derivative trading and structural breaks in volatility in India: an ICSS approach

Researchers argue that ignoring the structural breaks in the time-series variance can cause significant upward biases in the degree of persistence in estimated GARCH models. Against this backdrop, the present study empirically examines the effect of stock futures on the underlying stock’s volatility in India by incorporating the structural breaks with the help of ICSS test and AR (1)-GARCH (1, 1) model for 30 most liquid and actively traded underlying stocks and their associated futures contracts. The study period ranges from the 1st January 2000 or the listing date of the particular stock (whichever is prior) till 31st March 2019. The study contributes to the on-going debate regarding the effect of derivatives on the underlying stock market’s volatility in two ways. Firstly, by taking into consideration the breaks in the volatility and, secondly, studying the effect of single stock futures will allow us to evaluate company-specific response to futures trading directly. The study offers a mixed outcome for the stocks under consideration. However, there is evidence of a decline in unconditional volatility for the majority of the stocks. The overall findings indicate that trading in stock futures may not have any detrimental effect on the underlying stock’s volatility.

The Shale Revolution and the Dynamics of the Oil Market

We build and estimate a dynamic, structural model of the world oil market in order to quantify the impact of the shale revolution. We model the shale revolution as a dramatic decrease in shale production costs and explore how the resultant increase in shale production affects the level and volatility of oil prices over our sample. We find that oil prices in 2018 would have been roughly 36% higher had the shale revolution not occurred and that the shale revolution implies a reduction in current oil price volatility around 25% and a decline in long-run volatility of over 50%.

The volatility of world trade in the 21st century: Whose fault is it anyway?

AbstractThis paper explores the drivers of the volatility of international trade. It decomposes trade growth into six components that have gained attention in the literature and studies their contribution to overall volatility. It yields three main findings. First, trade volatility in the 1990–2015 period is mostly explained by a common factor, changes in the gravity‐related characteristics of a country's trading partners and country‐specific factors. Product composition and the identity of trading partners appear to be less important in explaining volatility. Second, the pre‐2009 decline in volatility and the post‐2009 increase in volatility appear to be driven by different factors. The former is mostly explained by a decline in the variance of country‐specific factors; the latter appears to be driven by an increase in the volatility of common factors. Third, diversification is a likely force behind the steady decline in the volatility stemming from country‐specific factors, especially in developing countries.

A NOTE ON MEASURING US TIME SERIES VOLATILITY DURING THE GREAT MODERATION

We identify volatility breaks in all testable series in the FRED database over the 1957–2013 period. This yields 17,681 breaks, which we categorize using text analysis. We show that 70.5% of series categories experienced a decline in volatility over the 1985–1999 period, suggesting that the Great Moderation was far broader in scope than the literature has documented. We also show that this decline reversed in 2000, leading to a sharp increase in volatility for most time series categories; however, this did not fully materialize in GDP volatility until the Great Recession. Finally, we identify labor markets, demographics, finance, and government debt as potential drivers of low-frequency shifts in volatility over the 1957–2013 period.

Rising Market Concentration and the Decline of Food Price Shock Pass-Through to Core Inflation

Using a vector autoregression that allows for time-varying parameters and stochastic volatility, we show that U.S. core inflation became 75 percent less responsive to shocks in food prices since the late 1970s. The decline in the pass-through of food price shocks to inflation is a result of a decline in both volatility and the persistence of food price changes in inflation. This decline in pass-through coincides with a period of increasing concentration in the food supply chain, especially among U.S. grocery retailers and distributors. We find that 60 percent of the variation in pass-through over the last four decades can be explained by changes in food retailers and distributors market concentration. Controlling for the composition of the food basket and inflation expectations explains an additional 20 percent of the variation. Our results suggest that if the market concentration of food retailers and distributors continues to increase and inflation expectations remain well-anchored, the pass-through of food price shocks to inflation will likely remain subdued.

Rising Market Concentration and the Decline of Food Price Shock Pass-Through to Core Inflation

Using a vector autoregression that allows for time-varying parameters and stochastic volatility, we show that U.S. core inflation became 75 percent less responsive to shocks in food prices since the late 1970s. The decline in the pass-through of food price shocks to inflation is a result of a decline in both volatility and the persistence of food price changes in inflation. This decline in pass-through coincides with a period of increasing concentration in the food supply chain, especially among U.S. grocery retailers and distributors. We find that 60 percent of the variation in pass-through over the last four decades can be explained by changes in food retailers and distributors market concentration. Controlling for the composition of the food basket and inflation expectations explains an additional 20 percent of the variation. Our results suggest that if the market concentration of food retailers and distributors continues to increase and inflation expectations remain well-anchored, the pass-through of food price shocks to inflation will likely remain subdued.

The decline in volatility in the US economy. A historical perspective

Abstract In this paper, we analyse the volatility of US GDP growth using quarterly series starting in 1875. We find structural breaks in volatility at the end of World War II and at the beginning of the Great Moderation period. We show that the Great Moderation volatility reduction is only linked to changes in expansions, whereas that after World War II is due to changes in both expansions and recessions. We also propose several methodologies to date the US business cycle in this long period. We find that taking volatility into account improves the characterization of the business cycle.

The Effect of a Government Reference Bond on Corporate Borrowing Costs: Evidence from a Natural Experiment

Researchers have recently studied the interactions between corporate and government bond issuances within many countries. Some conclude that government bonds compete with private bond issuances, while others maintain that government bonds provide valuable reference entities that improve the private sector’s ability to issue its own bonds. We study the special case of China’s 2017 issuance of two sovereign bonds denominated in U.S. dollars (USD). We find that USD-denominated Chinese corporate bonds experienced a decline in yield spreads, bid-ask spreads, and price volatility around the time of this sovereign issues’ announcement. The yield spread changes are particularly large for corporate bonds with maturities similar to those of the USD sovereigns. We conclude that these new bonds serve as useful reference instruments, helping investors to price and hedge the risks impounded in Chinese corporate bonds.