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.

Measurements of branching fraction ratios and CP asymmetries in B±→DCPK± decays in hadron collisions

We reconstruct B+/- -> D K+/- decays in a data sample collected by the CDF II detector at the Tevatron collider corresponding to 1 fb-1 of integrated luminosity. We select decay modes where the D meson decays to either K- pi+ (flavor eigenstate) or K- K+, pi- pi+ (CP-even eigenstates), and measure the direct CP asymmetry A_CP+ = 0.39 +/- 0.17(stat) +/- 0.04(syst), and the double ratio of CP-even to flavor eigenstate branching fractions R_CP+ = 1.30 +/- 0.24(stat) +/- 0.12(syst). These measurements will improve the determination of the CKM angle gamma. They are performed here for the first time using data from hadron collisions.

Essays on the Linkages Between Financial Markets, and Risk Asymmetries (summary section only)

During the last few decades there have been far going financial market deregulation, technical development, advances in information technology, and standardization of legislation between countries. As a result, one can expect that financial markets have grown more interlinked. The proper understanding of the cross-market linkages has implications for investment and risk management, diversification, asset pricing, and regulation. The purpose of this research is to assess the degree of price, return, and volatility linkages between both geographic markets and asset categories within one country, Finland. Another purpose is to analyze risk asymmetries, i.e., the tendency of equity risk to be higher after negative events than after positive events of equal magnitude. The analysis is conducted both with respect to total risk (volatility), and systematic risk (beta). The thesis consists of an introductory part and four essays. The first essay studies to which extent international stock prices comove. The degree of comovements is low, indicating benefits from international diversification. The second essay examines the degree to which the Finnish market is linked to the “world market”. The total risk is divided into two parts, one relating to world factors, and one relating to domestic factors. The impact of world factors has increased over time. After 1993, when foreign investors were allowed to freely invest in Finnish assets, the risk level has been higher than previously. This was also the case during the economic recession in the beginning of the 1990’s. The third essay focuses on the stock, bond, and money markets in Finland. According to a trading model, the degree of volatility linkages should be strong. However, the results contradict this. The linkages are surprisingly weak, even negative. The stock market is the most independent, while the money market is affected by events on the two other markets. The fourth essay concentrates on volatility and beta asymmetries. Contrary to many international studies there are only few cases of risk asymmetries. When they occur, they tend to be driven by the market-wide component rather than the portfolio specific element.

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.

Features of the geomagnetic field during the Holocene and Proterozoic

The geomagnetic field is one of the most fundamental geophysical properties of the Earth and has significantly contributed to our understanding of the internal structure of the Earth and its evolution. Paleomagnetic and paleointensity data have been crucial in shaping concepts like continental drift, magnetic reversals, as well as estimating the time when the Earth's core and associated geodynamo processes begun. The work of this dissertation is based on reliable Proterozoic and Holocene geomagnetic field intensity data obtained from rocks and archeological artifacts. New archeomagnetic field intensity results are presented for Finland, Estonia, Bulgaria, Italy and Switzerland. The data were obtained using sophisticated laboratory setups as well as various reliability checks and corrections. Inter-laboratory comparisons between three laboratories (Helsinki, Sofia and Liverpool) were performed in order to check the reliability of different paleointensity methods. The new intensity results fill up considerable gaps in the master curves for each region investigated. In order to interpret the paleointensity data of the Holocene period, a novel and user-friendly database (GEOMAGIA50) was constructed. This provided a new tool to independently test the reliability of various techniques and materials used in paleointensity determinations. The results show that archeological artifacts, if well fired, are the most suitable materials. Also lavas yield reliable paleointensity results, although they appear more scattered. This study also shows that reliable estimates are obtained using the Thellier methodology (and its modifications) with reliability checks. Global paleointensity curves during Paleozoic and Proterozoic have several time gaps with few or no intensity data. To define the global intensity behavior of the Earth's magnetic field during these times new rock types (meteorite impact rocks) were investigated. Two case histories are presented. The Ilyinets (Ukraine) impact melt rocks yielded a reliable paleointensity value at 440 Ma (Silurian), whereas the results from Jänisjärvi impact melts (Russian Karelia, ca. 700 Ma) might be biased towards high intensity values because of non-ideal magnetic mineralogy. The features of the geomagnetic field at 1.1 Ga are not well defined due to problems related to reversal asymmetries observed in Keweenawan data of the Lake Superior region. In this work new paleomagnetic, paleosecular variation and paleointensity results are reported from coeval diabases from Central Arizona and help understanding the asymmetry. The results confirm the earlier preliminary observations that the asymmetry is larger in Arizona than in Lake Superior area. Two of the mechanisms proposed to explain the asymmetry remain plausible: the plate motion and the non-dipole influence.

Spin and relativistic motion of bound states

The wave functions of moving bound states may be expected to contract in the direction of motion, in analogy to a rigid rod in classical special relativity, when the constituents are at equal (ordinary) time. Indeed, the Lorentz contraction of wave functions is often appealed to in qualitative discussions. However, only few field theory studies exist of equal-time wave functions in motion. In this thesis I use the Bethe-Salpeter formalism to study the wave function of a weakly bound state such as a hydrogen atom or positronium in a general frame. The wave function of the e^-e^+ component of positronium indeed turns out to Lorentz contract both in 1+1 and in 3+1 dimensional quantum electrodynamics, whereas the next-to-leading e^-e^+\gamma Fock component of the 3+1 dimensional theory deviates from classical contraction. The second topic of this thesis concerns single spin asymmetries measured in scattering on polarized bound states. Such spin asymmetries have so far mainly been analyzed using the twist expansion of perturbative QCD. I note that QCD vacuum effects may give rise to a helicity flip in the soft rescattering of the struck quark, and that this would cause a nonvanishing spin asymmetry in \ell p^\uparrow -> \ell' + \pi + X in the Bjorken limit. An analogous asymmetry may arise in p p^\uparrow -> \pi + X from Pomeron-Odderon interference, if the Odderon has a helicity-flip coupling. Finally, I study the possibility that the large single spin asymmetry observed in p p^\uparrow -> \pi(x_F,k_\perp) + X when the pion carries a high momentum fraction x_F of the polarized proton momentum arises from coherent effects involving the entire polarized bound state.

Hybrid Modelling of Titan's Interaction with the Magnetosphere of Saturn

In this dissertation we study the interaction between Saturn's moon Titan and the magnetospheric plasma and magnetic field. The method of research is a three-dimensional computer simulation model, that is used to simulate this interaction. The simulation model used is a hybrid model. Hybrid models enable individual tracking or tracing of ions and also take into account the particle motion in the propagation of the electromagnetic fields. The hybrid model has been developed at the Finnish Meteorological Institute. This thesis gives a general description of the effects that the solar wind has on Earth and other planets of our solar system. Planetary satellites can also have similar interactions with the solar wind but also with the plasma flows of planetary magnetospheres. Titan is clearly the largest among the satellites of Saturn and also the only known satellite with a dense atmosphere. It is the atmosphere that makes Titan's plasma interaction with the magnetosphere of Saturn so unique. Nevertheless, comparisons with the plasma interactions of other solar system bodies are valuable. Detecting charged plasma particles requires in situ measurements obtainable through scientific spacecraft. The Cassini mission has been one of the most remarkable international efforts in space science. Since 2004 the measurements and images obtained from instruments onboard the Cassini spacecraft have increased the scientific knowledge of Saturn as well as its satellites and magnetosphere in a way no one was probably able to predict. The current level of science on Titan is practically unthinkable without the Cassini mission. Many of the observations by Cassini instrument teams have influenced this research both the direct measurements of Titan as well as observations of its plasma environment. The theoretical principles of the hybrid modelling approach are presented in connection to the broader context of plasma simulations. The developed hybrid model is described in detail: e.g. the way the equations of the hybrid model are solved is shown explicitly. Several simulation techniques, such as the grid structure and various boundary conditions, are discussed in detail as well. The testing and monitoring of simulation runs is presented as an essential routine when running sophisticated and complex models. Several significant improvements of the model, that are in preparation, are also discussed. A main part of this dissertation are four scientific articles based on the results of the Titan model. The Titan model developed during the course of the Ph.D. research has been shown to be an important tool to understand Titan's plasma interaction. One reason for this is that the structures of the magnetic field around Titan are very much three-dimensional. The simulation results give a general picture of the magnetic fields in the vicinity of Titan. The magnetic fine structure of Titan's wake as seen in the simulations seems connected to Alfvén waves an important wave mode in space plasmas. The particle escape from Titan is also a major part of these studies. Our simulations show a bending or turning of Titan's ionotail that we have shown to be a direct result of the basic principles in plasma physics. Furthermore, the ion flux from the magnetosphere of Saturn into Titan's upper atmosphere has been studied. The modelled ion flux has asymmetries that would likely have a large impact in the heating in different parts of Titan's upper atmosphere.

Sijasynkretismi morfologian koetinkivenä

Syncretism and the overlapping of morphologi- cally distinct units or entire categories have different influences on morphosyntactically cumulative and less cumulative forms. The Finnic languages, in comparison to the more eastern Finno-Ugric languages, mainly display morphologically less complex forms. Morphologically there is a clear distinction in the way syncretism is manifested in the Finnic languages that, consequently, is one of the most distinct features in the inflectional system despite the close ge- nealogical affinity. This can concretely be seen in the differences in the case inflection of the southern, such as Livonian, Estonian and Votic, and northern Finnic languages, most notably Finnish, Karelian and Veps. The comparison of syncretism in these languages shows both cross-linguistic regularity and language-specific rules that determine syncretic forms. Diachronic change and the erosion of suffixal ele- ments are closely involved in the rise of syncretism. The paper exam- ines the symmetries and asymmetries in the occurrence of syncretic forms in Finnic case paradigms.

Modelling and Forecasting Property Rents and Returns (summary section only)

Recently, focus of real estate investment has expanded from the building-specific level to the aggregate portfolio level. The portfolio perspective requires investment analysis for real estate which is comparable with that of other asset classes, such as stocks and bonds. Thus, despite its distinctive features, such as heterogeneity, high unit value, illiquidity and the use of valuations to measure performance, real estate should not be considered in isolation. This means that techniques which are widely used for other assets classes can also be applied to real estate. An important part of investment strategies which support decisions on multi-asset portfolios is identifying the fundamentals of movements in property rents and returns, and predicting them on the basis of these fundamentals. The main objective of this thesis is to find the key drivers and the best methods for modelling and forecasting property rents and returns in markets which have experienced structural changes. The Finnish property market, which is a small European market with structural changes and limited property data, is used as a case study. The findings in the thesis show that is it possible to use modern econometric tools for modelling and forecasting property markets. The thesis consists of an introduction part and four essays. Essays 1 and 3 model Helsinki office rents and returns, and assess the suitability of alternative techniques for forecasting these series. Simple time series techniques are able to account for structural changes in the way markets operate, and thus provide the best forecasting tool. Theory-based econometric models, in particular error correction models, which are constrained by long-run information, are better for explaining past movements in rents and returns than for predicting their future movements. Essay 2 proceeds by examining the key drivers of rent movements for several property types in a number of Finnish property markets. The essay shows that commercial rents in local markets can be modelled using national macroeconomic variables and a panel approach. Finally, Essay 4 investigates whether forecasting models can be improved by accounting for asymmetric responses of office returns to the business cycle. The essay finds that the forecast performance of time series models can be improved by introducing asymmetries, and the improvement is sufficient to justify the extra computational time and effort associated with the application of these techniques.

Information Sharing in Banking: A Collusive Device?

We show that information sharing among banks may serve as a collusive device. An informational sharing agreement is an a-priori commitment to reduce informational asymmetries between banks in future lending. Hence, information sharing tends to increase the intensity of competition in future periods and, thus, reduces the value of informational rents in current competition. We contribute to the existing literature by emphasizing that a reduction in informational rents will also reduce the intensity of competition in the current period, thereby reducing competitive pressure in current credit markets. We provide a large class of economic environments, where a ban on information sharing would be strictly welfare-enhancing.

The Negative News Threshold - an Explanation for Negative Skewness in Stock Returns

A vast literature documents negative skewness and excess kurtosis in stock return distributions on several markets. We approach the issue of negative skewness from a different angle than in previous studies by suggesting a model, which we denote the “negative news threshold” hypothesis, that builds on asymmetrically distributed information and symmetric market responses. Our empirical tests reveal that returns for days when non-scheduled news are disclosed are the source of negative skewness in stock returns. This finding lends solid support to our model and suggests that negative skewness in stock returns is induced by asymmetries in the news disclosure policies of firm management.