Market risk and the concept of fundamental volatility : measuring volatility across asset and derivative markets and testing for the impact of derivatives markets on financial markets

摘要

This paper proposes an unobserved fundamental component of volatility as a measure ofudrisk. This concept of fundamental volatility may be more meaningful than the usualudmeasures of volatility for market regulators. Fundamental volatility can be obtained usinguda stochastic volatility model, which allows us to ‘filter’ out the signal in the volatilityudinformation. We decompose four FTSE100 stock index related volatilities into transitoryudnoise and unobserved fundamental volatility. Our analysis is applied to the question as toudwhether derivative markets destabilise asset markets. We find that introducing Europeanudoptions reduces fundamental volatility, while transitory noise in the underlying and futuresudmarkets does not show significant changes. We conclude that, for the FTSE100 index,udintroducing a new options market has stabilised both the underlying market and existingudderivative markets.