ARCH modeling in finance: A review of the theory and empirical evidence

Writing in the June  issue of the Economic Journal, Harry G. Johnson begins with a sentence seemingly calibrated to the scale of the book he set himself to review: “The long-awaited monetary history of the United States by Friedman and Schwartz is in every sense of the term a monumental scholarly achievement—monumental in its sheer bulk, monumental in the definitiveness of its treatment of innumerable issues, large and small . . . monumental, above all, in the theoretical and statistical effort and ingenuity that have been brought to bear on the solution of complex and subtle economic issues.” Friedman and Schwartz marshaled massive historical data and sharp analytics to support the claim that monetary policy—steady control of the money supply—matters profoundly in the management of the nation’s economy, especially in navigating serious economic fluctuations. In their influential chapter , “The Great Contraction”—which Princeton published in  as a separate paperback—they address the central economic event of the century, the Depression. According to Hugh Rockoff, writing in January : “If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz had contended, then the case for market economies was measurably stronger.” Milton Friedman won the Nobel Prize in Economics in  for work related to A Monetary History as well as to his other Princeton University Press book, A Theory of the Consumption Function ().

A Monetary History of the United States

A voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using ARCH and stochastic volatility models. While most of these studies have documented highly significant in-sample parameter estimates and pronounced intertemporal volatility persistence, traditional ex-post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts. Contrary to this contention, we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications. New methods for improved ex-post interdaily volatility measurements based on high-frequency intradaily data are also discussed.

https://faculty.washington.edu/ezivot/econ589//////AndersenBollerslevIER1998.pdf

Answering the skeptics: yes, standard volatility models do provide accurate forecasts*

We present a set of stylized empirical facts emerging from the statistical analysis of price variations in various types of financial markets. We first discuss some general issues common to all statistical studies of financial time series. Various statistical properties of asset returns are then described: distributional properties, tail properties and extreme fluctuations, pathwise regularity, linear and nonlinear dependence of returns in time and across stocks. Our description emphasizes properties common to a wide variety of markets and instruments. We then show how these statistical properties invalidate many of the common statistical approaches used to study financial data sets and examine some of the statistical problems encountered in each case.

/pdf/empirical-properties-of-asset-returns-stylized-facts-and-3gbrgrs0vm.pdf

Empirical properties of asset returns: stylized facts and statistical issues

Econometric policy evaluation: A critique

The Theory of Free Banking: Money Supply under Competitive Note Issue@@@The Evolution of Central Banks

The author is one of the UK's eminent monetary economists and a member of the UK's Monetary Policy Committee. After summarising his early academic career, he discusses his time at the Bank of England and the formation of UK monetary policy. This leads on to a survey of his later experiences in returning to academia and his analysis of foreign exchange markets and central bank autonomy. The movements of foreign exchange markets have been thought to react upon the arrival of news concerning changes in monetary policy. However, close examination of the US forex market does not show any significant fluctuations in reaction to particular news disclosures. Economic news with pre-announced release dates have been proven to produce jumps in volatility within minutes of disclosure. The use of high frequency data at given intervals has been shown to produce price spikes and subsidence after a few minutes. JEL Codes: E02, F31 Keywords: Market fluctuations, Economic news, Volatility, Foreign exchange markets

E ora dove

This paper assesses the choice of different regulatory policy instruments for crisis management and prevention. We show that Capital and Liquidity Requirements (as Basel III proposes) are not sufficient to ensure Financial Stability. Three different tools are required to address three different inefficiencies. Capital requirements mitigate 'structural' default frictions; liquidity requirements contain the contagious effects of small shocks by stemming the collapse of collateral and asset prices;
and margin requirements protect against excessive leverage and securitization.

Model Proposal: Default and Financial Regulation

Interaction between Wall Street and the London stock exchange : A test of the efficient market hypothesis

Economists can to some extent enlighten policymakers and the public and influence public policy. That enlightenment is achieved more by concrete policy work and application of basics than by fancy models and fancy statistical significance. There is a trade-off between relevance/importance and rigor/precision. Because many economists concentrate on rigor and precision, their influence in public affairs is not as good as it could be. The professional emphasis on scholastic crafts forsakes the Smithian character of political economy. A more Smithian character for the economics profession would lead to better government policy.

A plea to economists

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