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A test of speculative arbitrage : is the cross-section of volatility invariant?
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Barardehi, Yashar H., Bernhardt, Dan and Ruchti, Thomas G. (2019) A test of speculative arbitrage : is the cross-section of volatility invariant? Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1204). (Unpublished)
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Official URL: https://warwick.ac.uk/fac/soc/economics/research/w...
Abstract
We derive testable implications of Kyle and Obizhaeva’s (2016) notion of “bet invariance” for the cross-section of trade-time volatilities. We jointly develop theoretical foundations of “no speculative arbitrage” whose implications incorporate those of bet invariance. Our proposed test circumvents the unobservable nature of “bets.” Utilizing a large sample of U.S. stocks post decimilization, we show that using realized volatilities rather than expected volatilities introduces noise that substantially biases the tests. This leads us to use estimates of normalized volatilities based on running 24 month windows. We find strong support for no speculative arbitrage at a moment in time, but not across time.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Finance -- Econometric models, Econometrics, Securities -- Prices, Time-series analysis, Stocks -- Rate of return | ||||
Series Name: | Warwick economics research papers series (WERPS) | ||||
Publisher: | University of Warwick. Department of Economics | ||||
Place of Publication: | Coventry | ||||
ISSN: | 0083-7350 | ||||
Official Date: | July 2019 | ||||
Dates: |
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Number: | 1204 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Open Access (Creative Commons) |
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