Ray Chou

• PhD
• Head of Department at Academia Sinica

This study investigates the causal information flow between 45 major daily spot returns and their corresponding futures in developing, emerging, and commodity indices through a novel nonparametric wavelet Granger causality test (NWGC) that is capable of detecting causality patterns in various time scales without any stationarity assumption or multi...

One of the controversies of diversification is that it may not be necessarily beneficial to the banks as it leads to more severe systemic risk. Recent studies have modelled theoretical frameworks for the role of diversification in systemic risks faced by banks. As an alternative, we provide empirical evidence on this by examining the effects of ban...

In this paper we consider estimating an approximate factor model in which candidate predictors are subject to sharp spikes such as outliers or jumps. Given that these sharp spikes are assumed to be rare, we formulate the estimation problem as a penalized least squares problem by imposing a norm penalty function on those sharp spikes. Such a formula...

With respect to the rational expectation hypothesis, some previous studies adopted a behavioral perspective to explain why forecast biases occur. One widely-discussed behavioral bias in forecasting is the anchoring and adjustment heuristics. This paper proposes a two-anchor heterogeneity model to simultaneously estimate the anchoring biases in indi...

Approximate factor models and their extensions are widely used in economic analysis and forecasting due to their ability to extracting useful information from a large number of relevant variables. In these models, candidate predictors are typically subject to some common components. In this paper we propose a new method for robustly estimating the...

The literature on range volatility modeling has been rapidly expanding due to its importance and applications. This chapter provides alternative price range estimators and discusses their empirical properties and limitations. Besides, we review some relevant financial applications for range volatility, such as value-at-risk estimation, hedge, spill...

An outlier detection procedure in the lognormal logarithmic conditional autoregressive range (lognormal Log-CARR) model is proposed. The proposed test statistic is demonstrated to be well-sized and to have good power using Monte Carlo simulations. Furthermore, the outlier detection procedure suffers less from the masking effect caused by multiple o...

During the 2007–2009 financial crisis, US subprime mortgage risk exposures led to severe liquidity problems in several other foreign markets. Such risk contagion was caused by enormous changes in interest rates. Although risk contagion has been investigated by several literatures, the magnitude of propagated interest rate risk around global financi...

This paper investigates the non-monotonic and non-linear effect of diversification on mutual fund performance. We apply a frontier-based efficiency measure, the stochastic frontier approach, to estimate fund efficiency and the benefit of diversification. The empirical results indicate that concentration strategy may not be appropriate for fund mana...

On Taiwan's stock market, foreign institutional investors hold over one-third of the total market value and have enjoyed remarkable returns on their investments. Hence, it is important to investigate the trading behavior of foreign institutional investors. Previous studies have found that foreign institutional investors are momentum traders. This s...

This study investigates the sources of bank productivity growth in China over the period 2002–2009. In order to perform this research, we propose an advanced index – input slack-based productivity index (ISP) – a model that disaggregates total factor productivity growth into each input productivity change. Funds, capital, and employees are chosen a...

This paper examines the impact of the euro's launch on the dynamic structure of the stock markets for EU member countries. Using a smooth transition GARCH model for the daily stock index for the period January 1995 to May 2004, we find evidence of structural changes in the volatility dynamics of the stock markets of France, Germany, Spain and Italy...

Abstract This paper proposes a new ,range-based multivariate volatility model ,to estimate ,the time-varying optimal hedge ,ratios. We ,compare ,the out-of-sample performance ,of this model ,with those of other ,alternatives using data of ten ,futures contracts. The alternative methods ,include traditional static hedge ,method ,and other dynamic ,h...

We explore how the volatility affects both the level and variability of cost efficiency of Taiwanese and Chinese banks. Two volatility measures are used in this study: the banks' return on assets (ROA) volatility for a proxy of accounting-based volatility, and the stock return realized volatility for a proxy of market-based volatility. This paper a...

There has been a rapid growth of range volatility due to the demand of empirical finance. This paper contains a review of the important development of range volatility, including various range estimators and range-based volatility models. In addition, other alternative models developed recently, such as range-based multivariate volatility models an...

This paper proposes a multivariate model named Double Smooth Transition Conditional Correlation Conditional Autoregressive Range (DSTCC-CARR for short). Determined by two transition variables, the correlations smoothly transit from one state to another. Together with the DSTCC-GARCH model, the model is employed to investigate the interdependence be...

This paper proposes a range-based dynamic conditional correlation (DCC) model combined by the return-based DCC model and the conditional autoregressive range (CARR) model. The substantial gain in efficiency of volatility estimation can boost the accuracy for estimating time-varying covariances. As to the empirical study, we use the S&P 500 stock in...

This paper investigates the dynamic correlations among six international stock market indices and their relationship to inflation fluctuation and market volatility. The current research uses a newly developed time series model, the Double Smooth Transition Conditional Correlation with Conditional Auto Regressive Range (DSTCC-CARR) model. Findings r...

There is growing interest in utilizing the range data of asset prices to study the role of volatility in financial markets. In this paper, a new range-based volatility model was used to examine the economic value of volatility timing in a mean–variance framework. We compared its performance with a return-based dynamic volatility model in both in-sa...

Motivated by smooth transition GARCH and smooth transition ACD models, we add smooth transition mechanism into the conditional mean equation of the Conditional AutoRegressive Range (CARR) model of Chou (2005) and propose a new range-based volatility model: the smooth transition CARR model (henceforth STCARR). We derive a misspecification test stati...

This paper uses high-low price ranges to estimate the minimum variance hedge ratios within the framework of the Constant Conditional Correlation (CCC) and the Dynamic Conditional Correlation (DCC) models. Other alternative methods used for comparison include the week-by-week rollover OLS model, the return-based CCC model, and the return-based DCC m...

It is shown in Chou (2005). Journal of Money, Credit and Banking, 37, 561–582that the range can be used as a measure of volatility and the conditional autoregressive range (CARR) model performs better than generalized auto regressive conditional heteroskedasticity (GARCH) in forecasting volatilities of S&P 500 stock index. In this paper, we allow s...

This paper proposes a range-based Dynamic Conditional Correlation (DCC) model, which is an extension of Engle's (2002a) DCC model. The efficiency of the range data in volatility estimation is documented in Parkinson (1980), Alizadeh, Brandt, and Diebold (2002), Brandt and Jones (2002), and Chou (2004a, b), among others. It is hence natural to consi...

We propose a dynamic model for the high/low range of asset prices within fixed time intervals: the Conditional Autoregressive Range Model (henceforth CARR). The evolution of the conditional range is specified in a fashion similar to the conditional variance models as in GARCH and is very similar to the Autoregressive Conditional Duration (ACD) mode...

ARCH/GARCH family models have become popular in forecasting volatilities since the 1980's. In this paper we compare the empirical performance of the CARR model by Chou(2003) with the GARCH model. The CARR model effectively provides a dynamic structure for the range data which is more informative than conventional standpoint. Using the Taiwan Stock...

In this paper we investigate the evidence of short termism (myopic) in the U.S. stock market. A modified empirical method from the present value model is proposed to test short termism and characterize valuation bias by the GMM estimation. Our results find that exists significant short termism in the stock market.

In this paper we propose a class of new tests for time reversibility. It is shown that this test has an asymptotic normal distribution under the null hypothesis and non-trivial power under local alternatives. A novel feature of this test is that it does not have any moment restriction, in contrast with other time reversibility and linearity tests....

This study examines the relation between stock market volatility and the demand for hedging in S&P 500 stock index futures contracts. Open interest is used as a proxy for hedging demand. The analysis employs unique data that identify separately the open interest of large hedgers, large speculators, and smaller traders. Volatility estimates are deco...

This study examines the relation between stock market volatility and the demand for hedging in S&P 500 stock index futures contracts. Open interest is used as a proxy for hedging demand. The analysis employs unique data that identify separately the open interest of large hedgers, large speculators, and smaller traders. Volatility estimates are deco...

This paper analyzes the Taiwan stock market and examines its price and volatility linkages with those of the United States. In particular, it tests the hypothesis that the short-term volatility and price changes spill over from the developed markets, mainly the United States, to the emerging Taiwan stock market. The model and the test are built upo...

This paper studies short-and long-horizon correlations among stock returns of six major stock markets using canonical correlation analysis that decomposes stock prices into permanent and transitory components. We introduce an efficient approach to estimate the term structure of correlations (for different investment horizons) by incorporating the d...

This article has empirically studied determinants of interstate differentials in the S&L failure rate. The heteroskedastic-TOBIT model used in estimation turns out to perform much better than either OLS or the homoskedastic-TOBIT. Significant efficiency gain is obtained in formulating the multiplicative heteroskedasticity. Four types of variables a...

The purpose of this paper is to identify important determinants of the performance of commercial banks. Two profitability measures and one measure of loss are used as indicators of performance. Each of these measures is related to different types of bank assets and other variables. The choice of these measures and variables is justified by citing s...

In this paper, we derive evidence on the integration of international stock markets from the cointegration properties of international stock market prices. Using the multivariate cointegration test of Johansen, we find that the set of six country stock price indices, including that of the United States, Canada, the United Kingdom, France, Germany,...

We use a multivariate generalized autoregressive heteroskedasticity model (M-GARCH) to examine three stock indexes and their associated futures prices: the New York Stock Exchange Composite, S&P 500, and Toronto 35. The North American context is significant because markets in Canada and the United States share similar structures and regulatory envi...

Although volatility clustering has a long history as a salient empirical regularity characterizing high frequency speculative prices, it was not until recently that applied researchers in finance have recognized the importance of explicitly modeling time varying second order moments. Instrumental in most of these empirical studies has been the Auto...

We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...

SUMMARY In this paper issues of volatility persistence and the changing risk premium in the stock market are investigated using the GARCH estimation technique. We get a point estimate of the index of relative risk aversion of 4.5 and confirm the existence of changing equity premiums in the US during 1962-1985. The persistence of shocks to the stock...

We develop a new, modified Dynamic Conditional Correlation (DCC) model, called DCCX, which allows exogenous variables in the evolution of the conditional correlations in the standard DCC model of Engle (2002). Such an extension enabling structural modeling of the dynamic conditional correlations enriches the standard DCC, which is basically a reduc...

This paper examines the impact of the euro's launch on the dynamic structure of the stock markets for EU's member countries. Using a GARCH model for daily stock index for the period January 1995 -June 2004, we find evidence of convergence of the dynamic structure of the stock markets for France, Germany, Spain and Italy. In particular, both the sho...

This paper provides some evidence in support of the information transmission hypothesis that the onset of SIMEX's MSCI Taiwan index futures and TAIFEX's Taiwan index futures has helped stabilize the volatility process of Taiwan's spot market. We use daily data of Taiwan's stock index from January 1995 to December 2000 to estimate a GARCH model befo...

This article utilizes the multiplicative error model to analyze and compare the volatility spillover effect based on two volatility measures, namely, the volatility index and the price range. We find that the lead-lag relationships are similar based on these two volatility measures, and that there exists a structural break when the subprime mortgag...