Asset pricing

• Variance Premium, Downside Risk and Expected Stock Returns

  Staff Working Paper 2017-58 Bruno Feunou, Ricardo Lopez Aliouchkin, Roméo Tedongap, Lai Xi

  We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large cross-section of firms.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets JEL Code(s): G, G1, G12

• Risk-Neutral Moment-Based Estimation of Affine Option Pricing Models

  Staff Working Paper 2017-55 Bruno Feunou, Cédric Okou

  This paper provides a novel methodology for estimating option pricing models based on risk-neutral moments. We synthesize the distribution extracted from a panel of option prices and exploit linear relationships between risk-neutral cumulants and latent factors within the continuous time affine stochastic volatility framework.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods JEL Code(s): G, G1, G12

• Good Volatility, Bad Volatility and Option Pricing

  Staff Working Paper 2017-52 Bruno Feunou, Cédric Okou

  Advances in variance analysis permit the splitting of the total quadratic variation of a jump diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of the asymmetry in stock price distributions.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods JEL Code(s): G, G1, G12

• The Impacts of Monetary Policy Statements

  Staff Analytical Note 2017-22 Bruno Feunou, Corey Garriott, James Kyeong, Raisa Leiderman

  In this note, we find that market participants react to an unexpected change in the tone of Canadian monetary policy statements. When the market perceives that the Bank of Canada plans to tighten (or alternatively, loosen) the monetary policy earlier than previously expected, the Canadian dollar appreciates (or depreciates) and long-term Government of Canada bond yields increase (or decrease). The tone of a statement is particularly relevant to the market when the policy rate has been unchanged for some time.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Exchange rates, Interest rates, Monetary policy communications, Monetary policy transmission JEL Code(s): E, E4, E43, E5, E52, F, F3, F31, G, G1, G12

• On the Tail Risk Premium in the Oil Market

  Staff Working Paper 2017-46 Reinhard Ellwanger

  This paper shows that changes in market participants’ fear of rare events implied by crude oil options contribute to oil price volatility and oil return predictability. Using 25 years of historical data, we document economically large tail risk premia that vary substantially over time and significantly forecast crude oil futures and spot returns.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods, Financial markets JEL Code(s): C, C5, C53, C58, D, D8, D84, E, E4, E44, G, G1, G12, G13, Q, Q4, Q43

• Measuring Limits of Arbitrage in Fixed-Income Markets

  Staff Working Paper 2017-44 Jean-Sébastien Fontaine, Guillaume Nolin

  We use relative value to measure limits to arbitrage in fixed-income markets. Relative value captures apparent deviations from no-arbitrage relationships. It is simple, intuitive and can be computed model-free for any bond.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, International financial markets JEL Code(s): G, G1, G12

• A Counterfactual Valuation of the Stock Index as a Predictor of Crashes

  Staff Working Paper 2017-38 Tom Roberts

  Stock market fundamentals would not seem to meaningfully predict returns over a shorter-term horizon—instead, I shift focus to severe downside risk (i.e., crashes).

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial stability JEL Code(s): G, G0, G01, G1, G12, G17, G19

• Optimal Estimation of Multi-Country Gaussian Dynamic Term Structure Models Using Linear Regressions

  Staff Working Paper 2017-33 Antonio Diez de los Rios

  This paper proposes a novel asymptotic least-squares estimator of multi-country Gaussian dynamic term structure models that is easy to compute and asymptotically efficient, even when the number of countries is relatively large—a situation in which other recently proposed approaches lose their tractability.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods, Exchange rates, Interest rates JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15
• June 28, 2017

  Markets Calling: Intelligence Gathering at the Bank of Canada

  Remarks Lynn Patterson CFA Society Calgary Calgary, Alberta

  Deputy Governor Lynn Patterson discusses how the Bank gathers financial market intelligence and what it is learning.

  Content Type(s): Press, Speeches and appearances, Remarks Topic(s): Asset pricing, Credit and credit aggregates, Financial markets, Financial system regulation and policies, Monetary and financial indicators, Recent economic and financial developments

• Small‐Sample Tests for Stock Return Predictability with Possibly Non‐Stationary Regressors and GARCH‐Type Effects

  Staff Working Paper 2017-10 Sermin Gungor, Richard Luger

  We develop a simulation-based procedure to test for stock return predictability with multiple regressors. The process governing the regressors is left completely free and the test procedure remains valid in small samples even in the presence of non-normalities and GARCH-type effects in the stock returns.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods, Financial markets JEL Code(s): C, C1, C12, C3, C32, G, G1, G14