Essays in asset price bubbles

This thesis studies the field of asset price bubbles. It is comprised of three independent chapters. Each of these chapters either directly or indirectly analyse the existence or implications of asset price bubbles. The type of bubbles assumed in each of these chapters is consistent with rational expectations. Thus, the kind of price bubbles investigated here are known as rational bubbles in the literature. The following describes the three chapters. Chapter 1: This chapter attempts to explain the recent US housing price bubble by developing a heterogeneous agent endowment economy asset pricing model with risky housing, endogenous collateral and defaults. Investment in housing is subject to an idiosyncratic risk and some mortgages are defaulted in equilibrium. We analytically derive the leverage or the endogenous loan to value ratio. This variable comes from a limited participation constraint in a one period mortgage contract with monitoring costs. Our results show that low values of housing investment risk produces a credit easing effect encouraging excess leverage and generates credit driven rational price bubbles in the housing good. Conversely, high values of housing investment risk produces a credit crunch characterized by tight borrowing constraints, low leverage and low house prices. Furthermore, the leverage ratio was found to be procyclical and the rate of defaults countercyclical consistent with empirical evidence. Chapter 2: It is widely believed that financial assets have considerable persistence and are susceptible to bubbles. However, identification of this persistence and potential bubbles is not straightforward. This chapter tests for price bubbles in the United States housing market accounting for long memory and structural breaks. The intuition is that the presence of long memory negates price bubbles while the presence of breaks could artificially induce bubble behaviour. Hence, we use procedures namely semi-parametric Whittle and parametric ARFIMA procedures that are consistent for a variety of residual biases to estimate the value of the long memory parameter, d, of the log rent-price ratio. We find that the semi-parametric estimation procedures robust to non-normality and heteroskedasticity errors found far more bubble regions than parametric ones. A structural break was identified in the mean and trend of all the series which when accounted for removed bubble behaviour in a number of regions. Importantly, the United States housing market showed evidence for rational bubbles at both the aggregate and regional levels. In the third and final chapter, we attempt to answer the following question: To what extend should individuals participate in the stock market and hold risky assets over their lifecycle? We answer this question by employing a lifecycle consumption-portfolio choice model with housing, labour income and time varying predictable returns where the agents are constrained in the level of their borrowing. We first analytically characterize and then numerically solve for the optimal asset allocation on the risky asset comparing the return predictability case with that of IID returns. We successfully resolve the puzzles and find equity holding and participation rates close to the data. We also find that return predictability substantially alter both the level of risky portfolio allocation and the rate of stock market participation. High factor (dividend-price ratio) realization and high persistence of factor process indicative of stock market bubbles raise the amount of wealth invested in risky assets and the level of stock market participation, respectively. Conversely, rare disasters were found to bring down these rates, the change being severe for investors in the later years of the life-cycle. Furthermore, investors following time varying returns (return predictability) hedged background risks significantly better than the IID ones.

A deformation model of flexible, high area-to-mass ratio debris under perturbations and validation method

A new type of space debris was recently discovered by Schildknecht in near -geosynchronous orbit (GEO). These objects were later identified as exhibiting properties associated with High Area-to-Mass ratio (HAMR) objects. According to their brightness magnitudes (light curve), high rotation rates and composition properties (albedo, amount of specular and diffuse reflection, colour, etc), it is thought that these objects are multilayer insulation (MLI). Observations have shown that this debris type is very sensitive to environmental disturbances, particularly solar radiation pressure, due to the fact that their shapes are easily deformed leading to changes in the Area-to-Mass ratio (AMR) over time. This thesis proposes a simple effective flexible model of the thin, deformable membrane with two different methods. Firstly, this debris is modelled with Finite Element Analysis (FEA) by using Bernoulli-Euler theory called “Bernoulli model”. The Bernoulli model is constructed with beam elements consisting 2 nodes and each node has six degrees of freedom (DoF). The mass of membrane is distributed in beam elements. Secondly, the debris based on multibody dynamics theory call “Multibody model” is modelled as a series of lump masses, connected through flexible joints, representing the flexibility of the membrane itself. The mass of the membrane, albeit low, is taken into account with lump masses in the joints. The dynamic equations for the masses, including the constraints defined by the connecting rigid rod, are derived using fundamental Newtonian mechanics. The physical properties of both flexible models required by the models (membrane density, reflectivity, composition, etc.), are assumed to be those of multilayer insulation. Both flexible membrane models are then propagated together with classical orbital and attitude equations of motion near GEO region to predict the orbital evolution under the perturbations of solar radiation pressure, Earth’s gravity field, luni-solar gravitational fields and self-shadowing effect. These results are then compared to two rigid body models (cannonball and flat rigid plate). In this investigation, when comparing with a rigid model, the evolutions of orbital elements of the flexible models indicate the difference of inclination and secular eccentricity evolutions, rapid irregular attitude motion and unstable cross-section area due to a deformation over time. Then, the Monte Carlo simulations by varying initial attitude dynamics and deformed angle are investigated and compared with rigid models over 100 days. As the results of the simulations, the different initial conditions provide unique orbital motions, which is significantly different in term of orbital motions of both rigid models. Furthermore, this thesis presents a methodology to determine the material dynamic properties of thin membranes and validates the deformation of the multibody model with real MLI materials. Experiments are performed in a high vacuum chamber (10-4 mbar) replicating space environment. A thin membrane is hinged at one end but free at the other. The free motion experiment, the first experiment, is a free vibration test to determine the damping coefficient and natural frequency of the thin membrane. In this test, the membrane is allowed to fall freely in the chamber with the motion tracked and captured through high velocity video frames. A Kalman filter technique is implemented in the tracking algorithm to reduce noise and increase the tracking accuracy of the oscillating motion. The forced motion experiment, the last test, is performed to determine the deformation characteristics of the object. A high power spotlight (500-2000W) is used to illuminate the MLI and the displacements are measured by means of a high resolution laser sensor. Finite Element Analysis (FEA) and multibody dynamics of the experimental setups are used for the validation of the flexible model by comparing with the experimental results of displacements and natural frequencies.

Investigating assistive technology to support memory for people with cognitive impairments

Technologies such as automobiles or mobile phones allow us to perform beyond our physical capabilities and travel faster or communicate over long distances. Technologies such as computers and calculators can also help us perform beyond our mental capabilities by storing and manipulating information that we would be unable to process or remember. In recent years there has been a growing interest in assistive technology for cognition (ATC) which can help people compensate for cognitive impairments. The aim of this thesis was to investigate ATC for memory to help people with memory difficulties which impacts independent functioning during everyday life. Chapter one argues that using both neuropsychological and human computing interaction theory and approaches is crucial when developing and researching ATC. Chapter two describes a systematic review and meta-analysis of studies which tested technology to aid memory for groups with ABI, stroke or degenerative disease. Good evidence was found supporting the efficacy of prompting devices which remind the user about a future intention at a set time. Chapter three looks at the prevalence of technologies and memory aids in current use by people with ABI and dementia and the factors that predicted this use. Pre-morbid use of technology, current use of non-tech aids and strategies and age (ABI group only) were the best predictors of this use. Based on the results, chapter four focuses on mobile phone based reminders for people with ABI. Focus groups were held with people with memory impairments after ABI and ABI caregivers (N=12) which discussed the barriers to uptake of mobile phone based reminding. Thematic analysis revealed six key themes that impact uptake of reminder apps; Perceived Need, Social Acceptability, Experience/Expectation, Desired Content and Functions, Cognitive Accessibility and Sensory/Motor Accessibility. The Perceived need theme described the difficulties with insight, motivation and memory which can prevent people from initially setting reminders on a smartphone. Chapter five investigates the efficacy and acceptability of unsolicited prompts (UPs) from a smartphone app (ForgetMeNot) to encourage people with ABI to set reminders. A single-case experimental design study evaluated use of the app over four weeks by three people with severe ABI living in a post-acute rehabilitation hospital. When six UPs were presented through the day from ForgetMeNot, daily reminder-setting and daily memory task completion increased compared to when using the app without the UPs. Chapter six investigates another barrier from chapter 4 – cognitive and sensory accessibility. A study is reported which shows that an app with ‘decision tree’ interface design (ApplTree) leads to more accurate reminder setting performance with no compromise of speed or independence (amount of guidance required) for people with ABI (n=14) compared to a calendar based interface. Chapter seven investigates the efficacy of a wearable reminding device (smartwatch) as a tool for delivering reminders set on a smartphone. Four community dwelling participants with memory difficulties following ABI were included in an ABA single case experimental design study. Three of the participants successfully used the smartwatch throughout the intervention weeks and these participants gave positive usability ratings. Two participants showed improved memory performance when using the smartwatch and all participants had marked decline in memory performance when the technology was removed. Chapter eight is a discussion which highlights the implications of these results for clinicians, researchers and designers.

Pricing derivatives with stochastic volatility

This Ph.D. thesis contains 4 essays in mathematical finance with a focus on pricing Asian option (Chapter 4), pricing futures and futures option (Chapter 5 and Chapter 6) and time dependent volatility in futures option (Chapter 7). In Chapter 4, the applicability of the Albrecher et al.(2005)'s comonotonicity approach was investigated in the context of various benchmark models for equities and com- modities. Instead of classical Levy models as in Albrecher et al.(2005), the focus is the Heston stochastic volatility model, the constant elasticity of variance (CEV) model and the Schwartz (1997) two-factor model. It is shown that the method delivers rather tight upper bounds for the prices of Asian Options in these models and as a by-product delivers super-hedging strategies which can be easily implemented. In Chapter 5, two types of three-factor models were studied to give the value of com- modities futures contracts, which allow volatility to be stochastic. Both these two models have closed-form solutions for futures contracts price. However, it is shown that Model 2 is better than Model 1 theoretically and also performs very well empiri- cally. Moreover, Model 2 can easily be implemented in practice. In comparison to the Schwartz (1997) two-factor model, it is shown that Model 2 has its unique advantages; hence, it is also a good choice to price the value of commodity futures contracts. Fur- thermore, if these two models are used at the same time, a more accurate price for commodity futures contracts can be obtained in most situations. In Chapter 6, the applicability of the asymptotic approach developed in Fouque et al.(2000b) was investigated for pricing commodity futures options in a Schwartz (1997) multi-factor model, featuring both stochastic convenience yield and stochastic volatility. It is shown that the zero-order term in the expansion coincides with the Schwartz (1997) two-factor term, with averaged volatility, and an explicit expression for the first-order correction term is provided. With empirical data from the natural gas futures market, it is also demonstrated that a significantly better calibration can be achieved by using the correction term as compared to the standard Schwartz (1997) two-factor expression, at virtually no extra effort. In Chapter 7, a new pricing formula is derived for futures options in the Schwartz (1997) two-factor model with time dependent spot volatility. The pricing formula can also be used to find the result of the time dependent spot volatility with futures options prices in the market. Furthermore, the limitations of the method that is used to find the time dependent spot volatility will be explained, and it is also shown how to make sure of its accuracy.