Volatility, price-discovery and trading volume in Australian equity index and option markets : a dissertation presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, Auckland, New Zealand
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Date
2009
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Massey University
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Abstract
This dissertation investigates the information considerations of volatility, pricediscovery
and the relationship change in volume and volatility resulting from index
derivatives transactions on financial markets in Australia.
The impact of information on volatility was investigated in the essay one, as
volatility is a key factor for accurately pricing derivative securities. I assessed the
forecast accuracy, unbiasedness and information content of volatility forecasts, based on
implied volatility and conditional volatility models for the S&P/ASX 200 Index Options
market in Australia. The conditional volatility models produce the most accurate
forecasts and are robust when forecasting into short time horizons.
Essay two, investigates the information content of the index and option markets
in the price-discovery process. Based on the above volatility results, the long-run
equilibrium relationship between the share price index and the implied price of the
share-price-index option was investigated. Causality was determined to show which
market leads the other. Information share measures were used to gauge the contribution
of the share price index and index option markets to the price-discovery process.
Unambiguous evidence shows the index market leads the options market and the former
contributes more to price-discovery than the latter.
In essay three, I investigate the dynamic relationship between the future price
volatility of the S&P/ASX 200 Index and the trading volume of the S&P/ASX 200
Index Options to explore the informational role of option volume in predicting price
volatility. I found the contemporaneous call options volume have a significant strong
positive feedback effect on the implied volatility, but the contemporaneous feedback
effect of volume on the TARCH volatility is insignificant. The contemporaneous
feedback effects from the implied volatility and the TARCH volatility to the call options
volume are positive, significant and strong.
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Australian financial markets, Volatility forecasts, Australia