Modeling Nonlinearities and Asymmetries in Asset Pricing

Financial time series tend to behave in a manner that is not directly drawn from a normal distribution. Asymmetries and nonlinearities are usually seen and these characteristics need to be taken into account. To make forecasts and predictions of future return and risk is rather complicated. The existing models for predicting risk are of help to a certain degree, but the complexity in financial time series data makes it difficult. The introduction of nonlinearities and asymmetries for the purpose of better models and forecasts regarding both mean and variance is supported by the essays in this dissertation. Linear and nonlinear models are consequently introduced in this dissertation. The advantages of nonlinear models are that they can take into account asymmetries. Asymmetric patterns usually mean that large negative returns appear more often than positive returns of the same magnitude. This goes hand in hand with the fact that negative returns are associated with higher risk than in the case where positive returns of the same magnitude are observed. The reason why these models are of high importance lies in the ability to make the best possible estimations and predictions of future returns and for predicting risk.

An Empirical Comparison of Linear and Nonlinear Volatility Models for Nordic Stock Returns

This paper examines how volatility in financial markets can preferable be modeled. The examination investigates how good the models for the volatility, both linear and nonlinear, are in absorbing skewness and kurtosis. The examination is done on the Nordic stock markets, including Finland, Sweden, Norway and Denmark. Different linear and nonlinear models are applied, and the results indicates that a linear model can almost always be used for modeling the series under investigation, even though nonlinear models performs slightly better in some cases. These results indicate that the markets under study are exposed to asymmetric patterns only to a certain degree. Negative shocks generally have a more prominent effect on the markets, but these effects are not really strong. However, in terms of absorbing skewness and kurtosis, nonlinear models outperform linear ones.

Technology-related peso problems in stock returns

Although empirical evidence suggests the contrary, many asset pricing models assume stock returns to be symmetrically distributed. In this paper it is argued that the occurrence of negative jumps in a firm's future earnings and, consequently, in its stock price, is positively related to the level of network externalities in the firm's product market. If the ex post frequency of these negative jumps in a sample does not equal the ex ante assessed probability of occurrence, the sample is subject to a peso problem. The hypothesis is tested for by regressing the skewness coefficient of a firm’s realised stock return distribution on the firm’s R&D intensity, i.e. the ratio of the firm’s research and development expenditure to its net sales. The empirical results support the technology-related peso problem hypothesis. In samples subject to such a peso problem, the returns are biased up and the variance is biased down.

Evaluating the Predictability of the Volatility Smile Using Return Distributions

In this paper, we examine the predictability of observed volatility smiles in three major European index options markets, utilising the historical return distributions of the respective underlying assets. The analysis involves an application of the Black (1976) pricing model adjusted in accordance with the Jarrow-Rudd methodology as proposed in 1982. Thereby we adjust the expected future returns for the third and fourth central moments as these represent deviations from normality in the distributions of observed returns. Thus, they are considered one possible explanation to the existence of the smile. The obtained results indicate that the inclusion of the higher moments in the pricing model to some extent reduces the volatility smile, compared with the unadjusted Black-76 model. However, as the smile is partly a function of supply, demand, and liquidity, and as such intricate to model, this modification does not appear sufficient to fully capture the characteristics of the smile.

An Empirical Investigation of Value-at-Risk in Long and Short Trading Positions

This paper uses the Value-at-Risk approach to define the risk in both long and short trading positions. The investigation is done on some major market indices(Japanese, UK, German and US). The performance of models that takes into account skewness and fat-tails are compared to symmetric models in relation to both the specific model for estimating the variance, and the distribution of the variance estimate used as input in the VaR estimation. The results indicate that more flexible models not necessarily perform better in predicting the VaR forecast; the reason for this is most probably the complexity of these models. A general result is that different methods for estimating the variance are needed for different confidence levels of the VaR, and for the different indices. Also, different models are to be used for the left respectively the right tail of the distribution.

Grönlannin mannerjäätikön tulevaisuus: merenpinnan nousu maailmanlaajuisesti ja Itämerellä

Sea level rise is among the most worrying consequences of climate change, and the biggest uncertainty of sea level predictions lies in the future behaviour of the ice sheets of Greenland and Antarctica. In this work, a literature review is made concerning the future of the Greenland ice sheet and the effect of its melting on Baltic Sea level. The relation between sea level and ice sheets is also considered more generally from a theoretical and historical point of view. Lately, surprisingly rapid changes in the amount of ice discharging into the sea have been observed along the coastal areas of the ice sheets, and the mass deficit of Greenland and West Antarctic ice sheets which are considered vulnerable to warming has been increasing from the 1990s. The changes are probably related to atmospheric or oceanic temperature variations which affect the flow speed of ice either via meltwater penetrating to the bottom of the ice sheet or via changes in the flow resistance generated by the floating parts of an ice stream. These phenomena are assumed to increase the mass deficit of the ice sheets in the warming climate; however, there is no comprehensive theory to explain and model them. Thus, it is not yet possible to make reliable predictions of the ice sheet contribution to sea level rise. On the grounds of the historical evidence it appears that sea level can rise rather rapidly, 1 2 metres per century, even during warm climate periods. Sea level rise projections of similar magnitude have been made with so-called semiempirical methods that are based on modelling the link between sea level and global mean temperature. Such a rapid rise would require considerable acceleration of the ice sheet flow. Stronger rise appears rather unlikely, among other things because the mountainous coastline restricts ice discharge from Greenland. The upper limit of sea level rise from Greenland alone has been estimated at half a metre by the end of this century. Due to changes in the Earth s gravity field, the sea level rise caused by melting ice is not spatially uniform. Near the melting ice sheet the sea level rise is considerably smaller than the global average, whereas farther away it is slightly greater than the average. Because of this phenomenon, the effect of the Greenland ice sheet on Baltic Sea level will probably be rather small during this century, 15 cm at most. Melting of the Antarctic ice sheet is clearly more dangerous for the Baltic Sea, but also very uncertain. It is likely that the sea level predictions will become more accurate in the near future as the ice sheet models develop.

Metsän erirakenteisuutta edistävien hakkuiden kannattavuustarkastelu metsäaluetasolla

Tutkimuksessa vertailtiin metsän erirakenteisuutta edistävien poimintahakkuiden ja pienaukkohakkuiden kannattavuutta metsänhoitosuositusten mukaiseen metsänkasvatukseen Keski-Suomessa. Poimintahakkuut ja pienaukkohakkuut ovat menetelmiä, joilla voidaan lisätä luonnonmetsän häiriödynamiikan mukaista pienipiirteistä elinympäristöjen vaihtelua ja siksi ne sopivat etenkin erityiskohteisiin monimuotoisuuden, maiseman tai metsien monikäytön vuoksi. Ne johtavat yleensä vähitellen eri-ikäisrakenteiseen metsään, jossa puuston läpimittaluokkajakauma muistuttaa käänteistä J-kirjainta. Eri-ikäisrakenteisen metsänkäsittelyn taloudellista kannattavuutta puoltavat uudistumiskustannusten poisjäänti ja tukkipuihin painottuvat säännöllisin väliajoin toteutuvat hakkuut. Menetelmän soveltumista Suomen olosuhteisiin pidetään kuitenkin epävarmana. Tässä tutkimuksessa tarkasteltiin tasaikäisrakenteisen metsän muuttamista eri-ikäisrakenteiseksi 40 vuoden siirtymäaikana Metsähallituksen hallinnoimassa Isojäven ympäristöarvometsässä Kuhmoisissa. Tutkimusaineisto koostui 405 kuusivaltaisesta tasaikäisestä kuviosta, joiden pinta-alasta metsämaata on 636 hehtaaria. Metsän kehitystä simuloitiin puutason kasvumalleja käyttäen ja käsittelytoimenpiteet simuloitiin viisivuotiskausittain SIMO-metsäsuunnitteluohjelmistolla. Simulointien avulla selvitettiin jokaisen käsittelyskenaarion hakkuumäärät puutavaralajeittain, diskontatut kassavirrat ja puustopääoman muutos tarkasteluajanjakson aikana. Puunkorjuun yksikkökustannusten laskennan apuna käytettiin automatisoitua seurantajärjestelmää, jossa metsäkoneisiin asennettuilla matkapuhelimilla kerättiin MobiDoc2-sovelluksella metsäkoneiden käytöstä kiihtyvyystiedot, GPS-paikkatiedot ja syötetiedot. Lopulta jokaiselle käsittelyskenaariolle laskettiin metsän puuntuotannollista arvoa kuvaavalla tuottoarvon yhtälöllä nettonykyarvot, josta vähennettiin diskontatut puunkorjuun kustannukset. Tutkimuksen tulosten mukaan poimintahakkuun NPV oli 3 prosentin korkokannalla noin 91 % (7420 €/ha) ja pienaukkohakkuiden noin 99 % (8076 €/ha) metsänhoitosuositusten mukaisesta käsittelystä (8176 €/ha). Komparatiivinen statiikka osoitti, että korkokannan kasvattaminen 5 prosenttiin ei olennaisesti lisännyt nettonykyarvojen eroja. Poimintahakkuiden puunkorjuun yksikkökustannukset olivat 0,8 €/m3 harvennushakkuita pienemmät ja 7,2 €/m3 uudistushakkuita suuremmat. Pienaukkohakkuiden yksikkökustannukset olivat 0,7 €/m3 uudistushakkuita suuremmat.Tulosten perusteella on väistämätöntä että siirtymävaihe tasaikäisrakenteisesta eri-ikäisrakenteiseksi metsäksi aiheuttaa taloudellisia tappioita siitäkin huolimatta, että hakkuut ovat voimakkaita ja tehdään varttuneeseen kasvatusmetsään. Tappion määrä on metsän peitteisyyden ylläpidosta aiheutuva vaihtoehtoiskustannus.

"Kyl mä varmaan kohta ymmärrän." : Asunnon suunnittelu -opetusohjelma oppilaiden ajattelun ja oppimisen haastajana peruskoulun kotitalousopetuksessa

"I will soon understand." The House Planning Program as an Enhancer of Pupils´ Thinking Skills and Learning in Home Economics at Comprehensive School The aim of the research was to build a study program for home economics education in order to enhance pupils´ thinking skills. The program was based on the intervention programs or strategies known as Cognitive Acceleration (CA), which are founded on the theories of Jean Piaget, Lev Vygotsky, and Reuven Feuerstein. In addition, Carl Bereiter s theory of knowledge building was integrated to the research. The viewpoint of home economics was based on the multidimensional foundation of home economics science, particularly household technology and house planning. I first analyzed the kind of body of knowledge home economics science and home economics education provides for enhancing thinking skills in home economics. For the study, a CATE (Cognitive Acceleration through Technology Education) program was adapted and modified and a House Planning program was created for home economics classes. The house planning program consisted of five lessons during which pupils learned how to make functional floor plans as well as choose furniture, household appliances and materials for the home. In order to obtain the required data, various classroom experiments were arranged in 2005 with grade 9 pupils at a comprehensive school in Helsinki. All the experiments were videotaped, and five hours of the videotaped material was edited and transcribed for closer examination. The material consisted of all the video-recorded activity of the selected study group. Interaction study and content analysis were used to analyze the data. Following the experiments, a small survey was conducted to solicit pupils´ and teacher´s opinions of the program. The analysis sheds light on the nature of pupils´ interaction and knowledge building in small group activity. Special attention was given to tracking pupils´ interaction during the socalled construction zone activity. The models and qualities of teacher´s aid and support during the lessons were examined as well. The results revealed the versatility of the pupils social interaction and common knowledge building that occurred during the small group activity. The pupils discussions, including their arguments, their sharing of ideas, and the multiple perspectives that emerged reflected home economics knowledge building. The construction zone activity appeared through expressions of cognitive conflict and metacognition. Cognitive conflict was evident in the pupils´ words and involved questioning, doubting and disputing. The metacognitive activity emerged by thinking aloud, choosing the strategies, and negotiating the results. The pupils also coordinated their activity, allocated the responsibility, and systematized their work. The teacher assisted by preparing new themes for the pupils and by participating in the small group work. The teacher´s help during the small group sessions strengthened the pupils activity in the construction zone. The results showed that one can utilize the wide multidisciplinary basis of home economics, which includes scientific knowledge but also the knowledge derived from practical activity and experience. In this study practical activity was undertaken as a planning project the result of which was a plan or a new vision for the house planning situation. The study showed that the House Planning program was able to enhance the pupils´ social interaction and collaboration. The learning environment challenged the pupils in a way that could be a gateway to further developing their thinking skills. The method of analysis created in the study could be a potential tool for examining social interaction, construction zone activity, and knowledge building in other learning environments as well. Key words: home economics, house planning, classroom experiment, thinking skills,cognitive conflict, metacognition, social interaction, knowledge building