Bo Young Chang is a Principal Economist in the Financial Stability Department at the Bank of Canada. She joined the Bank after completing her PhD in Finance from McGill University in 2011. Her main area of research is in empirical asset pricing and risk management, with special focus on derivatives and downside risk. Since joining the Bank, she has conducted policy work in various topics including option-implied risk metrics, non-bank financial intermediation, sovereign debt management, and resolution of financial market infrastructure.
This note examines the costs of the Government of Canada bond buyback and switch programs between 1998 and 2016. Our analysis indicates that the auction design of the buyback program was effective in retiring government debt with minimal costs resulting from bid shading in auctions and price impact.
We use bid data from Government of Canada bond auctions between 1999 and 2021 to gauge the yield sensitivity of these bonds to the issuance amount. Our new metric estimates the demand function of the bidders at each auction and offers insights into the relationship between supply and yield of government bonds.
A put option is a financial contract that gives the holder the right to sell an asset at a specific price by (or at) a specific date. A put option can therefore provide its holder insurance against a large drop in the stock price. This makes the prices of put options an ideal source of information for a market-based measure of the probability of a firm’s default.
There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability.
We measure uncertainty surrounding the central bank’s future policy rates using implied volatility computed from interest rate option prices and realized volatility computed from intraday prices of interest rate futures.
Uncertainty surrounding the Bank of Canada’s future policy rates is measured using implied volatility computed from interest rate options and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following major policy actions taken by the Bank in response to the 2007–09 financial crisis. Findings also indicate that, on average, uncertainty decreases following the Bank’s policy rate announcements.
In Monitoring Shadow Banking in Canada: A Hybrid Approach, Bo Young Chang, Michael Januska, Gitanjali Kumar and André Usche discuss how lending that occurs outside the traditional banking system provides benefits to the economy but must be monitored carefully for potential financial sector vulnerabilities. They describe how the Bank defines and measures shadow banking and how it assesses vulnerabilities in the sector, using an approach that examines both markets and entities.
“Option-Implied Measures of Equity Risk” (with Peter Christoffersen, Kris Jacobs, and Gregory Vainberg), Review of Finance, 16 (2), 385-428, 2012.
“Market Skewness Risk and the Cross-Section of Stock Returns” (with Peter Christoffersen and Kris Jacobs), Journal of Financial Economics, forthcoming.
Other
Chapters in books
Chapter on Forecasting Using Option Prices, (with Peter Christoffersen and Kris Jacobs), 2012, Handbook of Economic Forecasting, Volume 2, edited by Graham Elliott and Allan Timmermann, in the Handbooks in Economics Series edited by Kenneth J. Arrow and Michael D. Intriligator, forthcoming.
Research
“Option-Implied Risk Around Mergers and Acquisitions” (with Gregory Vainberg), working paper
“Option-Implied Quantiles and the Expected Market Return” working paper
