Modeling Asymmetries in Financial Data with Multiplicative Error Models

This thesis addresses modeling of financial time series, especially stock market returns and daily price ranges. Modeling data of this kind can be approached with so-called multiplicative error models (MEM). These models nest several well known time series models such as GARCH, ACD and CARR models. They are able to capture many well established features of financial time series including volatility clustering and leptokurtosis. In contrast to these phenomena, different kinds of asymmetries have received relatively little attention in the existing literature. In this thesis asymmetries arise from various sources. They are observed in both conditional and unconditional distributions, for variables with non-negative values and for variables that have values on the real line. In the multivariate context asymmetries can be observed in the marginal distributions as well as in the relationships of the variables modeled. New methods for all these cases are proposed. Chapter 2 considers GARCH models and modeling of returns of two stock market indices. The chapter introduces the so-called generalized hyperbolic (GH) GARCH model to account for asymmetries in both conditional and unconditional distribution. In particular, two special cases of the GARCH-GH model which describe the data most accurately are proposed. They are found to improve the fit of the model when compared to symmetric GARCH models. The advantages of accounting for asymmetries are also observed through Value-at-Risk applications. Both theoretical and empirical contributions are provided in Chapter 3 of the thesis. In this chapter the so-called mixture conditional autoregressive range (MCARR) model is introduced, examined and applied to daily price ranges of the Hang Seng Index. The conditions for the strict and weak stationarity of the model as well as an expression for the autocorrelation function are obtained by writing the MCARR model as a first order autoregressive process with random coefficients. The chapter also introduces inverse gamma (IG) distribution to CARR models. The advantages of CARR-IG and MCARR-IG specifications over conventional CARR models are found in the empirical application both in- and out-of-sample. Chapter 4 discusses the simultaneous modeling of absolute returns and daily price ranges. In this part of the thesis a vector multiplicative error model (VMEM) with asymmetric Gumbel copula is found to provide substantial benefits over the existing VMEM models based on elliptical copulas. The proposed specification is able to capture the highly asymmetric dependence of the modeled variables thereby improving the performance of the model considerably. The economic significance of the results obtained is established when the information content of the volatility forecasts derived is examined.

Studies on the international effects of real shocks

This doctoral thesis addresses the macroeconomic effects of real shocks in open economies in flexible exchange rate regimes. The first study of this thesis analyses the welfare effects of fiscal policy in a small open economy, where private and government consumption are substitutes in terms of private utility. The main findings are as follows: fiscal policy raises output, bringing it closer to its efficient level, but is not welfare-improving even though government spending directly affects private utility. The main reason for this is that the introduction of useful government spending implies a larger crowding-out effect on private consumption, when compared with the `pure waste' case. Utility decreases since one unit of government consumption yields less utility than one unit of private consumption. The second study of this thesis analyses the question of how the macroeconomic effects of fiscal policy in a small open economy depend on optimal intertemporal behaviour. The key result is that the effects of fiscal policy depend on the size of the elasticity of substitution between traded and nontraded goods. In particular, the sign of the current account response to fiscal policy depends on the interplay between the intertemporal elasticity of aggregate consumption and the elasticity of substitution between traded and nontraded goods. The third study analyses the consequences of productive government spending on the international transmission of fiscal policy. A standard result in the New Open Economy Macroeconomics literature is that a fiscal shock depreciates the exchange rate. I demonstrate that the response of the exchange rate depends on the productivity of government spending. If productivity is sufficiently high, a fiscal shock appreciates the exchange rate. It is also shown that the introduction of productive government spending increases both domestic and foreign welfare, when compared with the case where government spending is wasted. The fourth study analyses the question of how the international transmission of technology shocks depends on the specification of nominal rigidities. A growing body of empirical evidence suggests that a positive technology shock leads to a temporary decline in employment. In this study, I demonstrate that the open economy dimension can enhance the ability of sticky price models to account for the evidence. The reasoning is as follows. An improvement in technology appreciates the nominal exchange rate. Under producer-currency pricing, the exchange rate appreciation shifts global demand toward foreign goods away from domestic goods. This causes a temporary decline in domestic employment.

Antipredator behaviour of Baltic planktivores

Predation is an important source of mortality for most aquatic animals. Thus, the ability to avoid being eaten brings substantial fitness benefits to individuals. Predator detection abilities and antipredator behaviour were examined in various planktivores, i.e. the littoral mysids Neomysis integer and Praunus flexuosus, three-spined stickleback Gasterosteus aculeatus larvae, pelagic mysids Mysis mixta and M. relicta, and the predatory cladoceran Cercopagis pengoi, with cues from their respective predators European perch Perca fluviatilis and Baltic herring Clupea harengus membras. The use of different aquatic macrophytes as predation refuges by the littoral planktivores was also examined. All pelagic planktivores and stickleback larvae were able to detect the presence of their predator by chemical cues alone. The littoral mysids N. integer and P. flexuosus responded only when chemical and visual predator cues were combined. The responses of stickleback larvae were stronger to the combined cues than the chemical cue alone. A common antipredator behaviour in all of the planktivores studied was decreased ingestion rate in response to predator cues. N. integer and stickleback larvae also decreased their swimming activity. Pelagic mysids and C. pengoi altered their prey selectivity patterns in response to predator cues. The effects of predator cues on the swarming behaviour of N. integer were examined. Swarming brings clear antipredator advantages to N. integer, since when they feed in a swarm, they do not significantly decrease their feeding rate. However, the swarming behaviour of N. integer was not affected by predation risk, but was instead a fixed strategy. Despite the presence or absence of predator cues, N. integer individuals attempted to associate with a swarm and preferred larger to smaller swarms. In studies with aquatic macrophytes, stickleback larvae and P. flexuosus utilized vegetation as a predation refuge, spending more time within vegetation when under predation threat. The two macroalgal species studied, bladderwrack Fucus vesiculosus and stonewort Chara tomentosa, were preferred by P. flexuosus, whereas Eurasian watermilfoil Myriophyllum spicatum was strongly avoided by N. integer and stickleback larvae. In fact, when in dense patches in aquaria, M. spicatum caused acute and high mortality (> 70%) in littoral mysids, but not in sticklebacks, whereas C. tomentosa and northern watermilfoil M. sibiricum did not. In contrast, only 2-4% mortality in N. integer was observed with intact and broken stems of M. spicatum in field experiments. The distribution of littoral mysids in different vegetations, however, suggests that N. integer avoids areas vegetated by M. spicatum.