Modeling and Forecasting Implied Volatility: Implications for Trading, Pricing, and Risk Management

Modeling and forecasting of implied volatility (IV) is important to both practitioners and academics, especially in trading, pricing, hedging, and risk management activities, all of which require an accurate volatility. However, it has become challenging since the 1987 stock market crash, as implied volatilities (IVs) recovered from stock index options present two patterns: volatility smirk(skew) and volatility term-structure, if the two are examined at the same time, presents a rich implied volatility surface (IVS). This implies that the assumptions behind the Black-Scholes (1973) model do not hold empirically, as asset prices are mostly influenced by many underlying risk factors. This thesis, consists of four essays, is modeling and forecasting implied volatility in the presence of options markets’ empirical regularities. The first essay is modeling the dynamics IVS, it extends the Dumas, Fleming and Whaley (DFW) (1998) framework; for instance, using moneyness in the implied forward price and OTM put-call options on the FTSE100 index, a nonlinear optimization is used to estimate different models and thereby produce rich, smooth IVSs. Here, the constant-volatility model fails to explain the variations in the rich IVS. Next, it is found that three factors can explain about 69-88% of the variance in the IVS. Of this, on average, 56% is explained by the level factor, 15% by the term-structure factor, and the additional 7% by the jump-fear factor. The second essay proposes a quantile regression model for modeling contemporaneous asymmetric return-volatility relationship, which is the generalization of Hibbert et al. (2008) model. The results show strong negative asymmetric return-volatility relationship at various quantiles of IV distributions, it is monotonically increasing when moving from the median quantile to the uppermost quantile (i.e., 95%); therefore, OLS underestimates this relationship at upper quantiles. Additionally, the asymmetric relationship is more pronounced with the smirk (skew) adjusted volatility index measure in comparison to the old volatility index measure. Nonetheless, the volatility indices are ranked in terms of asymmetric volatility as follows: VIX, VSTOXX, VDAX, and VXN. The third essay examines the information content of the new-VDAX volatility index to forecast daily Value-at-Risk (VaR) estimates and compares its VaR forecasts with the forecasts of the Filtered Historical Simulation and RiskMetrics. All daily VaR models are then backtested from 1992-2009 using unconditional, independence, conditional coverage, and quadratic-score tests. It is found that the VDAX subsumes almost all information required for the volatility of daily VaR forecasts for a portfolio of the DAX30 index; implied-VaR models outperform all other VaR models. The fourth essay models the risk factors driving the swaption IVs. It is found that three factors can explain 94-97% of the variation in each of the EUR, USD, and GBP swaption IVs. There are significant linkages across factors, and bi-directional causality is at work between the factors implied by EUR and USD swaption IVs. Furthermore, the factors implied by EUR and USD IVs respond to each others’ shocks; however, surprisingly, GBP does not affect them. Second, the string market model calibration results show it can efficiently reproduce (or forecast) the volatility surface for each of the swaptions markets.

Regio- and stereoselectivity of oxidative coupling reactions of phenols : Spirodienones as construction units in lignin

Dimeric phenolic compounds lignans and dilignols form in the so-called oxidative coupling reaction of phenols. Enzymes such as peroxidases and lac-cases catalyze the reaction using hydrogen peroxide or oxygen respectively as oxidant generating phenoxy radicals which couple together according to certain rules. In this thesis, the effects of the structures of starting materials mono-lignols and the effects of reaction conditions such as pH and solvent system on this coupling mechanism and on its regio- and stereoselectivity have been studied. After the primary coupling of two phenoxy radicals a very reactive quinone me-thide intermediate is formed. This intermediate reacts quickly with a suitable nucleophile which can be, for example, an intramolecular hydroxyl group or another nucleophile such as water, methanol, or a phenolic compound in the reaction system. This reaction is catalyzed by acids. After the nucleophilic addi-tion to the quinone methide, other hydrolytic reactions, rearrangements, and elimination reactions occur leading finally to stable dimeric structures called lignans or dilignols. Similar reactions occur also in the so-called lignification process when monolignol (or dilignol) reacts with the growing lignin polymer. New kinds of structures have been observed in this thesis. The dimeric com-pounds with so-called spirodienone structure have been observed to form both in the dehydrodimerization of methyl sinapate and in the beta-1-type cross-coupling reaction of two different monolignols. This beta-1-type dilignol with a spirodienone structure was the first synthetized and published dilignol model compound, and at present, it has been observed to exist as a fundamental construction unit in lignins. The enantioselectivity of the oxidative coupling reaction was also studied for obtaining enantiopure lignans and dilignols. A rather good enantioselectivity was obtained in the oxidative coupling reaction of two monolignols with chiral auxiliary substituents using peroxidase/H2O2 as an oxidation system. This observation was published as one of the first enantioselective oxidative coupling reaction of phenols. Pure enantiomers of lignans were also obtained by using chiral cryogenic chromatography as a chiral resolution technique. This technique was shown to be an alternative route to prepare enantiopure lignans or lignin model compounds in a preparative scale.

Benthic-pelagic coupling in the northern Baltic Sea: importance of bioturbation and benthic predation

Benthic-pelagic coupling describes processes that operate across and between the seafloor and open-water ecosystems. In soft-sediment communities, bioturbation by sediment-dwelling and epibenthic organisms may strongly shape habitat characteristics and influence processes, e.g. biogeochemical cycling, which supplies bioavailable nutrients to pelagic primary producers. In addition, benthic fauna may mediate benthic-pelagic coupling by affecting the survival and hatching of zooplankton dormant eggs in the sediment. In the shallow waters and seasonally fluctuating environment of the Baltic Sea, emergence from the seafloor essentially contributes to the dynamics of zooplankton pelagic populations. In this thesis, I examine how benthic organisms with different functional traits affect the link between the benthic and pelagic systems in the northern Baltic Sea. By means of experimental laboratory studies, the effects of sediment-dwelling (Monoporeia affinis, Macoma balthica and Marenzelleria spp.) and nectobenthic (Mysis spp.) taxa on the survival and hatching of zooplankton benthic eggs and on benthic nutrient fluxes and sediment structure were investigated. In the predation studies, the nectobenthic mysids Mysis spp. preyed upon benthic eggs of the cladoceran Bosmina longispina maritima (syn. B. coregoni maritima), both in pelagic and benthic environments. Of the sediment-dwelling species, the amphipod M. affinis and the bivalve M. balthica reduced the number of cladoceran eggs in the sediment, whereas the polychaetes Marenzelleria spp. had no effects on cladoceran eggs. Both M. balthica and M. affinis also increased the mortality rates of benthic eggs of copepods and rotifers. It was estimated that zooplankton eggs provide an additional carbon source for food-limited benthic communities. The results indicate that predation pressure on zooplankton benthic eggs may be strong, but varies widely depending on the season and the functional characteristics of the macrofauna. Macoma balthica buried cladoceran eggs and a fluorescent tracer from the sediment surface to a depth of 3 4 cm, indicating efficient sediment mixing. In contrast, the other taxa had fewer effects on particle distributions. In addition to organic matter mineralization, particle mixing is crucial to the success of benthic recruitment of zooplankton, since only eggs close to the sediment surface may hatch. Macoma balthica and M. affinis altered the patterns of zooplankton emergence from the sediment. In general, the highest emergence rates were observed in the absence of macroscopic fauna, and M. balthica exerted a stronger suppressive effect than M. affinis. Moreover, copepods were less severely affected than cladocerans, while only one species (Temora longicornis) clearly benefited from the presence of the macrofauna. These differences probably result from species-specific differences in the resistance of eggs to disturbances. The results show that benthic fauna may considerably alter the patterns of zooplankton emergence from the seafloor, thereby shaping zooplankton pelagic populations. The semi-motile M. balthica and Marenzelleria spp. increased the fluxes of phosphate and ammonium from the sediment to the water, whereas the motile M. affinis and Mysis mixta had a contrasting effect. In the eutrophied Baltic Sea, efficient internal cycling of bioavailable nutrients forms a strong feedback inhibiting the recovery of the ecosystem. Based on the results, a change in species dominance from the two motile taxa, susceptible to oxygen deficiency, to the more tolerant semi-motile taxa provides additional feedback, strengthening internal nutrient cycling and accelerating eutrophication, with deteriorating near-bottom oxygen conditions and changes in the benthic communities. In shallow-water ecosystems, benthic nutrient regeneration plays a key role in determining the overall productivity of the ecosystem. In addition, the results of this study show that the communities in the benthos may essentially contribute to the structure of those in the plankton.

Observations of the solar wind-magnetosphere-ionosphere coupling

In this thesis, the solar wind-magnetosphere-ionosphere coupling is studied observationally, with the main focus on the ionospheric currents in the auroral region. The thesis consists of five research articles and an introductory part that summarises the most important results reached in the articles and places them in a wider context within the field of space physics. Ionospheric measurements are provided by the International Monitor for Auroral Geomagnetic Effects (IMAGE) magnetometer network, by the low-orbit CHAllenging Minisatellite Payload (CHAMP) satellite, by the European Incoherent SCATter (EISCAT) radar, and by the Imager for Magnetopause-to-Aurora Global Exploration (IMAGE) satellite. Magnetospheric observations, on the other hand, are acquired from the four spacecraft of the Cluster mission, and solar wind observations from the Advanced Composition Explorer (ACE) and Wind spacecraft. Within the framework of this study, a new method for determining the ionospheric currents from low-orbit satellite-based magnetic field data is developed. In contrast to previous techniques, all three current density components can be determined on a matching spatial scale, and the validity of the necessary one-dimensionality approximation, and thus, the quality of the results, can be estimated directly from the data. The new method is applied to derive an empirical model for estimating the Hall-to-Pedersen conductance ratio from ground-based magnetic field data, and to investigate the statistical dependence of the large-scale ionospheric currents on solar wind and geomagnetic parameters. Equations describing the amount of field-aligned current in the auroral region, as well as the location of the auroral electrojets, as a function of these parameters are derived. Moreover, the mesoscale (10-1000 km) ionospheric equivalent currents related to two magnetotail plasma sheet phenomena, bursty bulk flows and flux ropes, are studied. Based on the analysis of 22 events, the typical equivalent current pattern related to bursty bulk flows is established. For the flux ropes, on the other hand, only two conjugate events are found. As the equivalent current patterns during these two events are not similar, it is suggested that the ionospheric signatures of a flux rope depend on the orientation and the length of the structure, but analysis of additional events is required to determine the possible ionospheric connection of flux ropes.

Data integration from two microarray platforms identifies bi-allelic genetic inactivation of RIC8A in a breast cancer cell line

Background: Using array comparative genomic hybridization (aCGH), a large number of deleted genomic regions have been identified in human cancers. However, subsequent efforts to identify target genes selected for inactivation in these regions have often been challenging. Methods: We integrated here genome-wide copy number data with gene expression data and non-sense mediated mRNA decay rates in breast cancer cell lines to prioritize gene candidates that are likely to be tumour suppressor genes inactivated by bi-allelic genetic events. The candidates were sequenced to identify potential mutations. Results: This integrated genomic approach led to the identification of RIC8A at 11p15 as a putative candidate target gene for the genomic deletion in the ZR-75-1 breast cancer cell line. We identified a truncating mutation in this cell line, leading to loss of expression and rapid decay of the transcript. We screened 127 breast cancers for RIC8A mutations, but did not find any pathogenic mutations. No promoter hypermethylation in these tumours was detected either. However, analysis of gene expression data from breast tumours identified a small group of aggressive tumours that displayed low levels of RIC8A transcripts. qRT-PCR analysis of 38 breast tumours showed a strong association between low RIC8A expression and the presence of TP53 mutations (P = 0.006). Conclusion: We demonstrate a data integration strategy leading to the identification of RIC8A as a gene undergoing a classical double-hit genetic inactivation in a breast cancer cell line, as well as in vivo evidence of loss of RIC8A expression in a subgroup of aggressive TP53 mutant breast cancers.