Bruno Feunou is a Senior Analyst at the Bank of Canada’s Financial Markets Department. Before this position at the Bank of Canada, he worked at Duke University as a post-doc associate. He completed his Ph.D-Degree at the University of Montreal. During his thesis, he was supported by several Grants including IFM2, Banque Laurentienne, CIREQ and CREST. He also studied Mathematics and Statistics at several universities in Africa including the University of Dschang, Yaoundé I, ISSEA of Yaoundé and ENSEA of Abidjan. In these studies, he was supported by a grant from the European Union to study Statistics and Econometrics.
We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on return variance once we include market illiquidity as an economic variable in the model.
We greatly expand the space of tractable term-structure models. We consider one example that combines positive yields with rich volatility and correlation dynamics. Bond prices are expressed in closed form and estimation is straightforward.
Foreign investment flows into Government of Canada (GoC) bonds have surged since the financial crisis. Our empirical analysis suggests that foreign flows of $150 billion lowered the 10-year GoC bond yield by 100 basis points between 2009 and 2012.
Under very general conditions, the total quadratic variation of a jump-diffusion process can be decomposed into diffusive volatility and squared jump variation. We use this result to develop a new option valuation model in which the underlying asset price exhibits volatility and jump intensity dynamics.
We decompose the variance risk premium into upside and downside variance risk premia. These components reflect market compensation for changes in good and bad uncertainties. Their difference is a measure of the skewness risk premium (SRP), which captures asymmetric views on favorable versus undesirable risks.