Maximum Loss Calculation using Scenario Analysis, Heavy Tails and Implied Volatility Patterns

The objective of this paper is to improve option risk monitoring by examining the information content of implied volatility and by introducing the calculation of a single-sum expected risk exposure similar to the Value-at-Risk. The figure is calculated in two steps. First, there is a need to estimate the value of a portfolio of options for a number of different market scenarios, while the second step is to summarize the information content of the estimated scenarios into a single-sum risk measure. This involves the use of probability theory and return distributions, which confronts the user with the problems of non-normality in the return distribution of the underlying asset. Here the hyperbolic distribution is used to describe one alternative for dealing with heavy tails. Results indicate that the information content of implied volatility is useful when predicting future large returns in the underlying asset. Further, the hyperbolic distribution provides a good fit to historical returns enabling a more accurate definition of statistical intervals and extreme events.

Performance of Finnish Mutual Funds: A Decomposition Approach

Mutual funds have increased in popularity among Finnish investors in recent years. In this study returns on domestic funds have been decomposed into several elements that measure different aspects of fund performance. The results indicate that fund managers in the long run tend to allocate fund capital between different stock categories in a profitable way. When it comes to the short term timing of their allocation decisions they are however unable to further improve overall performance. The evidence also suggests that managers possess the ability to pick above average performing stocks within the individual stock categories. During the investigated period most funds returned more than a broad benchmark index even after fees and indirect costs were taken into account.

Evaluating Option Pricing Models

This study evaluates three different time units in option pricing: trading time, calendar time and continuous time using discrete approximations (CTDA). The CTDA-time model partitions the trading day into 30-minute intervals, where each interval is given a weight corresponding to the historical volatility in the respective interval. Furthermore, the non-trading volatility, both overnight and weekend volatility, is included in the first interval of the trading day in the CTDA model. The three models are tested on market prices. The results indicate that the trading-time model gives the best fit to market prices in line with the results of previous studies, but contrary to expectations under non-arbitrage option pricing. Under non-arbitrage pricing, the option premium should reflect the cost of hedging the expected volatility during the option’s remaining life. The study concludes that the historical patterns in volatility are not fully accounted for by the market, rather the market prices options closer to trading time.

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.

The Influence of World Factors on Finnish Stock Market Volatility

This paper investigates to what extent the volatility of Finnish stock portfolios is transmitted through the "world volatility". We operationalize the volatility processes of Finnish leverage, industry, and size portfolio returns by asymmetric GARCH specifications according to Glosten et al. (1993). We use daily return data for January, 2, 1987 to December 30, 1998. We find that the world shock significantly enters the domestic models, and that the impact has increased over time. This applies also for the variance ratios, and the correlations to the world. The larger the firm, the larger is the world impact. The conditional variance is higher during recessions. The asymmetry parameter is surprisingly non-significant, and the leverage hypothesis cannot be verified. The return generating process of the domestic portfolio returns does usually not include the world information set, thus indicating that the returns are generated by a segmented conditional asset pricing model.

Short-Horizon Asymmetric Mean-Reversion and Overreactions: Evidence from the Nordic Stock Markets

This paper examines the asymmetric behavior of conditional mean and variance. Short-horizon mean-reversion behavior in mean is modeled with an asymmetric nonlinear autoregressive model, and the variance is modeled with an Exponential GARCH in Mean model. The results of the empirical investigation of the Nordic stock markets indicates that negative returns revert faster to positive returns when positive returns generally persist longer. Asymmetry in both mean and variance can be seen on all included markets and are fairly similar. Volatility rises following negative returns more than following positive returns which is an indication of overreactions. Negative returns lead to increased variance and positive returns leads even to decreased variance.

Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets.

Monetary Policy, Stock Price Misalignments and Macroeconomic Instability

Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.

Cobreaking of Stock Prices and Contagion

Financial crises have shown that dramatic movements in one financial market can have a powerful impact on other markets. The paper proposes to use cobreaking to model comovements between financial markets during crises and to test for conta-gion. It finds evidence of cobreaking between stock returns in developed markets. Finding cobreaking has implications for the diversification of international investments. For emerging mar-ket stock returns the evidence of cobreaking is mainly due to the non-financial event of the 9/11 terrorist attacks in 2001. Fi-nancial crises originating in one emerging market do not spread to other markets, i.e., no contagion.

Intraday Linkages across International Equity Markets

Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets.

Corporate Governance Mechanisms and Firm Performance:Evidence from Finland

This paper examines the association between corporate governance attributes and firm performance of Finnish firms during 1990 – 2000. The empirical results suggest that corporate governance matters for firm performance. First, univariate test results indicate that firms characterized by a high (efficient) level of corporate governance have delivered greater stock returns, are higher valued based on the measure of Tobin’s Q, and exhibit higher ratios of cash flow to assets, on average, in comparison to their counterparts characterized by a low (inefficient) level of corporate governance. Second, controlling for a number of well-known determinants of stock returns, we find evidence that firms categorized by inefficient corporate governance have delivered inferior returns to shareholders during the investigation period. Finally, after controlling for several common determinants of firm value, we find that firms characterized by efficient corporate governance have been valued higher during the investigation period, measured by Tobin’s Q.

Crosstalk between the sympathetic nervous system, inflammation and coagulation in gestational diabetes; a therapeutic approach in postmenopausal hypertension

The occurrence of gestational diabetes (GDM) during pregnancy is a powerful sign of a risk of later type 2 diabetes (T2D) and cardiovascular diseases (CVDs). The physiological basis for this disease progression is not yet fully understood, but increasing evidence exists on interplay of insulin resistance, subclinical inflammation, and more recently, on unbalance of the autonomic nervous system. Since the delay in development of T2D and CVD after GDM ranges from years to decades, better understanding of the pathophysiology of GDM could give us new tools for primary prevention. The present study was aimed at investigating the role of the sympathetic nervous system (SNS) in GDM and its associations with insulin and a variety of inflammatory cytokines and coagulation and fibrinolysis markers. This thesis covers two separate study lines. Firstly, we investigated 41 women with GDM and 22 healthy pregnant and 14 non-pregnant controls during the night in hospital. Blood samples were drawn at 24:00, 4:00 and 7:00 h to determine the concentrations of plasma glucose, insulin, noradrenaline (NA) and adrenomedullin, markers of subclinical inflammation, coagulation and fibrinolysis variables and platelet function. Overnight holter ECG recording was performed for analysis of heart rate variability (HRV). Secondly, we studied 87 overweight hypertensive women with natural menopause. They were randomised to use a central sympatholytic agent, moxonidine (0.3mg twice daily), the β-blocking agent atenolol (50 mg once daily+blacebo once daily) for 8 weeks. Inflammatory markers and adiponectin were analysed at the beginning and after 8 weeks. Activation of the SNS (increase in NA, decreased HRV) was seen in pregnant vs. non-pregnant women, but no difference existed between GDM and normal pregnancy. However, modulation (internal rhythm) of HRV was attenuated in GDM. Insulin and inflammatory cytokine levels were comparable in all pregnant women but nocturnal variation of concentrations of C-reactive protein, serum amyloid A and insulin were reduced in GDM. Levels of coagulation factor VIII were lower in GDM compared with normal pregnancy, whereas no other differences were seen in coagulation and fibrinolysis markers. No significant associations were seen between NA and the studied parameters. In the study of postmenopausal women, moxonidine treatment was associated with favourable changes in the inflammatory profile, seen as a decrease in TNFα concentrations (increase in atenolol group) and preservation of adiponectin levels (decrease in atenolol group). In conclusion, our results did not support our hypotheses of increased SNS activity in GDM or a marked association between NA and inflammatory and coagulation markers. Reduced biological variation of HRV, insulin and inflammatory cytokines suggests disturbance of autonomic and hormonal regulatory mechanisms in GDM. This is a novel finding. Further understanding of the regulatory mechanisms could allow earlier detection of risk women and the possibility of prevention. In addition, our results support consideration of the SNS as one of the therapeutic targets in the battle against metabolic diseases, including T2D and CVD.

Aspergillus niger -proliiniendopeptidaasi prolamiinien eliminoinnissa

Tutkielman kirjallisuusosassa perehdyttiin vehnän, rukiin ja ohran, eli Triticeaeprolamiinien erityisasemaan keliakianäkökulmasta tarkasteltuna ja prolamiinien hydrolyysiin proliinispesifeillä entsyymeillä. Lisäksi tarkasteltiin prolamiinien immunologisia määritysmenetelmiä. Keliakiassa haitalliset gluteenipeptidit sisältävät runsaasti proliinia ja ovat hankalia pilkkoa muilla kuin proliinispesifeillä peptidaaseilla. Suurin osa immunologisen reaktion aiheuttavista gluteenilähtöisistä peptideistä voidaan pilkkoa idätetyn viljan endogeenisilla entsyymeillä happamissa olosuhteissa, mutta jäljellejäävä prolamiinipitoisuus ylittää edelleen gluteenittomille tuotteille sallitun rajan. Kokeellisen työn tavoitteena oli eliminoida happamalla mallasinkubaatiolla valmistettujen vehnä-, ohra- ja ruismallasautolysaattien sisältämä jäännösprolamiini Aspergillus niger -homeen tuottamalla proliinispesifillä endopeptidaasilla (AN-PEP) siten, että hydrolysaattia voitaisiin käyttää gluteenittomissa leivontasovelluksissa. Proteiinien hydrolyysiä tarkkailtiin kokoekskluusiokromatografialla (SEC), vapaan aminotypen (FAN) muodostumisena ja SDS-PAGE-elektroforeesilla. Jäännösprolamiinien pilkkoutumista seurattiin immunologisella R5-ELISA-menetelmällä. AN-PEP-inkubaatiolla saatiin aikaan voimakasta prolamiinien pilkkoutumista; mallasautolysaattien jäännösprolamiinista pilkkoutui yli 96 %. SEC- ja FAN-analyysien perusteella inkubaatioaikaa kannatti jatkaa yli 4 h, jolloin polypeptidit pilkkoutuivat edelleen pienemmiksi hydrolyysituotteiksi. Vehnä- ja ruismallashydrolysaattien prolamiinipitoisuuden todettiin laskevan 22 h inkubaation aikana alle tason 100 mg/kg R5-ELISA-menetelmällä määritettynä. Matalimmat prolamiinipitoisuudet saavutettiin AN-PEP-pitoisuudella 35 ?l / g mallasautolysaattia. Codex Alimentarius -komission säädöksen mukaan keliakiaruokavalioon soveltuvat ns. erittäin vähägluteeniset tuotteet saavat sisältää gluteenia enintään 100 mg/kg. Erityisesti AN-PEP-käsiteltyä ruismallasraaka-ainetta voitaisiin mahdollisesti käyttää tuomaan rukiista aromia gluteenittomiin leipiin. Ennen kuin mallashydrolysaatit ovat valmiita kaupallisiin sovelluksiin, on tarkasteltava niiden todellisia mahdollisuuksia parantaa elintarvikkeiden makua ja aromia sekä todettava uuden teknologian turvallisuus keliaakikoille.

The phenomenon of oligarchy in Russia and its impact on Russian transition

Nowadays any analysis of Russian economy is incomplete without taking into account the phenomenon of oligarchy. Russian oligarchs appeared after the fall of the Soviet Union and are represented by wealthy businessmen who control a huge part of natural resources enterprises and have a big political influence. Oligarchs’ shares in some natural resources industries reach even 70-80%. Their role in Russian economy is big without any doubts, however there has been very little economic analysis done. The aim of this work is to examine Russian oligarchy on micro and macro levels, its role in Russia’s transition and the possible positive and negative outcomes from this phenomenon. For this purpose the work presents two theoretical models. The first part of this thesis work examines the role of oligarchs on micro level, concentrating on the question whether the oligarchs can be more productive owners than other types of owners. To answer the question this part presents a model based on the article “Are oligarchs productive? Theory and evidence” by Y. Gorodnichenko and Y. Grygorenko. It is followed by empirical test based on the works of S. Guriev and A. Rachinsky. The model predicts oligarchs to invest more in the productivity of their enterprises and have higher returns on capital, therefore be more productive owners. According to the empirical test, oligarchs were found to outperform other types of owners, however it is not defined whether the productivity gains offset losses in tax revenue. The second part of the work concentrates on the role of oligarchy on macro level. More precisely, it examines the assumption that the depression after 1998 crises in Russia was caused by the oligarchs’ behavior. This part presents a theoretical model based on the article “A macroeconomic model of Russian transition: The role of oligarchic property rights” by S. Braguinsky and R. Myerson, where the special type of property rights is introduced. After the 1998 crises oligarchs started to invest all their resources abroad to protect themselves from political risks, which resulted in the long depression phase. The macroeconomic model shows, that better protection of property rights (smaller political risk) or/and higher outside investing could reduce the depression. Taking into account this result, the government policy can change the oligarchs’ behavior to be more beneficial for the Russian economy and make the transition faster.

Taloustilanteen heikkenemisestä johtuvat muutokset asuntosijoittamiseen pääkaupunkiseudulla 2008

Tutkielman tavoitteena on selvittää miten taloustaantuma vaikutti asuntosijoittamisen kiinnostavuuteen ja asuntomarkkinoilla käytävään keskusteluun vuonna 2008. Tuolloin Suomen talous taantui voimakkaasti ja nopeasti yllättäen myös ennusteita laativat asiantuntijat. Ekonomistien lausunnoista puuttui yhdenmukaisuus ja tarkkuus. Ne myös saattoivat muuttua merkittävästi lyhyellä aikavälillä. Taantumassa sijoitusviestintä on varovaista ja tarkasti muotoiltua. Sijoittajat uskovat mielellään muiden sijoittajien mielipiteitä ja käsityksiä vaikkei niiden taustalla olisikaan aina todennettua faktatietoa. Asiantuntijoiden tilastoihin halutaan uskoa vaikka niitä kohtaan koetaan epäilyksiä. Toisaalta asuntosijoittamisen kannattavuuteen ja taloudelliseen tuottoon halutaan uskoa vaikka asiantuntijat voisivat todistaa toisin. Tutkimus toteutettiin kvalitatiivisena tapaustutkimuksena jota analysoitiin Greimasin aktanttimallia mukaillen. Tutkimusaineisto koostui 14 Helsingin Sanomissa julkaistuista asuntosijoittamiseen liittyvistä artikkelista sekä 13 Taloussanomien keskustelupalstalla julkaistusta mielipidekirjoituksesta. Viestien merkityksiä käytiin läpi semioottisesti määrittelemällä eri aktanteille rooleja. Tarinassa sijoittajasubjektin objektina on asunto, jonka avulla pyritään saavuttamaan mahdollisimman suuri rahallinen tuotto. Lähettäjiä ovat muun muassa tilastojen laatijat ja sijoitusneuvojat. Kaikki optimaalisen sijoituspäätöksen tekemiseen vaikuttavat aktantit käydään tarkemmin läpi tutkimuksen loppupuolella.