Stochastic modelling of financial time series with memory and multifractal scaling

Financial processes may possess long memory and their probability densities may display heavy tails. Many models have been developed to deal with this tail behaviour, which reflects the jumps in the sample paths. On the other hand, the presence of long memory, which contradicts the efficient market hypothesis, is still an issue for further debates. These difficulties present challenges with the problems of memory detection and modelling the co-presence of long memory and heavy tails. This PhD project aims to respond to these challenges. The first part aims to detect memory in a large number of financial time series on stock prices and exchange rates using their scaling properties. Since financial time series often exhibit stochastic trends, a common form of nonstationarity, strong trends in the data can lead to false detection of memory. We will take advantage of a technique known as multifractal detrended fluctuation analysis (MF-DFA) that can systematically eliminate trends of different orders. This method is based on the identification of scaling of the q-th-order moments and is a generalisation of the standard detrended fluctuation analysis (DFA) which uses only the second moment; that is, q = 2. We also consider the rescaled range R/S analysis and the periodogram method to detect memory in financial time series and compare their results with the MF-DFA. An interesting finding is that short memory is detected for stock prices of the American Stock Exchange (AMEX) and long memory is found present in the time series of two exchange rates, namely the French franc and the Deutsche mark. Electricity price series of the five states of Australia are also found to possess long memory. For these electricity price series, heavy tails are also pronounced in their probability densities. The second part of the thesis develops models to represent short-memory and longmemory financial processes as detected in Part I. These models take the form of continuous-time AR(∞) -type equations whose kernel is the Laplace transform of a finite Borel measure. By imposing appropriate conditions on this measure, short memory or long memory in the dynamics of the solution will result. A specific form of the models, which has a good MA(∞) -type representation, is presented for the short memory case. Parameter estimation of this type of models is performed via least squares, and the models are applied to the stock prices in the AMEX, which have been established in Part I to possess short memory. By selecting the kernel in the continuous-time AR(∞) -type equations to have the form of Riemann-Liouville fractional derivative, we obtain a fractional stochastic differential equation driven by Brownian motion. This type of equations is used to represent financial processes with long memory, whose dynamics is described by the fractional derivative in the equation. These models are estimated via quasi-likelihood, namely via a continuoustime version of the Gauss-Whittle method. The models are applied to the exchange rates and the electricity prices of Part I with the aim of confirming their possible long-range dependence established by MF-DFA. The third part of the thesis provides an application of the results established in Parts I and II to characterise and classify financial markets. We will pay attention to the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the NASDAQ Stock Exchange (NASDAQ) and the Toronto Stock Exchange (TSX). The parameters from MF-DFA and those of the short-memory AR(∞) -type models will be employed in this classification. We propose the Fisher discriminant algorithm to find a classifier in the two and three-dimensional spaces of data sets and then provide cross-validation to verify discriminant accuracies. This classification is useful for understanding and predicting the behaviour of different processes within the same market. The fourth part of the thesis investigates the heavy-tailed behaviour of financial processes which may also possess long memory. We consider fractional stochastic differential equations driven by stable noise to model financial processes such as electricity prices. The long memory of electricity prices is represented by a fractional derivative, while the stable noise input models their non-Gaussianity via the tails of their probability density. A method using the empirical densities and MF-DFA will be provided to estimate all the parameters of the model and simulate sample paths of the equation. The method is then applied to analyse daily spot prices for five states of Australia. Comparison with the results obtained from the R/S analysis, periodogram method and MF-DFA are provided. The results from fractional SDEs agree with those from MF-DFA, which are based on multifractal scaling, while those from the periodograms, which are based on the second order, seem to underestimate the long memory dynamics of the process. This highlights the need and usefulness of fractal methods in modelling non-Gaussian financial processes with long memory.

Semantic oscillations : encoding context and structure in complex valued holographic vectors

In computational linguistics, information retrieval and applied cognition, words and concepts are often represented as vectors in high dimensional spaces computed from a corpus of text. These high dimensional spaces are often referred to as Semantic Spaces. We describe a novel and efficient approach to computing these semantic spaces via the use of complex valued vector representations. We report on the practical implementation of the proposed method and some associated experiments. We also briefly discuss how the proposed system relates to previous theoretical work in Information Retrieval and Quantum Mechanics and how the notions of probability, logic and geometry are integrated within a single Hilbert space representation. In this sense the proposed system has more general application and gives rise to a variety of opportunities for future research.

Convexity, Classification, and Risk Bounds

Many of the classification algorithms developed in the machine learning literature, including the support vector machine and boosting, can be viewed as minimum contrast methods that minimize a convex surrogate of the 0–1 loss function. The convexity makes these algorithms computationally efficient. The use of a surrogate, however, has statistical consequences that must be balanced against the computational virtues of convexity. To study these issues, we provide a general quantitative relationship between the risk as assessed using the 0–1 loss and the risk as assessed using any nonnegative surrogate loss function. We show that this relationship gives nontrivial upper bounds on excess risk under the weakest possible condition on the loss function—that it satisfies a pointwise form of Fisher consistency for classification. The relationship is based on a simple variational transformation of the loss function that is easy to compute in many applications. We also present a refined version of this result in the case of low noise, and show that in this case, strictly convex loss functions lead to faster rates of convergence of the risk than would be implied by standard uniform convergence arguments. Finally, we present applications of our results to the estimation of convergence rates in function classes that are scaled convex hulls of a finite-dimensional base class, with a variety of commonly used loss functions.

Practical aspects of frequency-domain identification of dynamic models of marine structures from hydrodynamic data

The motion response of marine structures in waves can be studied using finite-dimensional linear-time-invariant approximating models. These models, obtained using system identification with data computed by hydrodynamic codes, find application in offshore training simulators, hardware-in-the-loop simulators for positioning control testing, and also in initial designs of wave-energy conversion devices. Different proposals have appeared in the literature to address the identification problem in both time and frequency domains, and recent work has highlighted the superiority of the frequency-domain methods. This paper summarises practical frequency-domain estimation algorithms that use constraints on model structure and parameters to refine the search of approximating parametric models. Practical issues associated with the identification are discussed, including the influence of radiation model accuracy in force-to-motion models, which are usually the ultimate modelling objective. The illustration examples in the paper are obtained using a freely available MATLAB toolbox developed by the authors, which implements the estimation algorithms described.

Population of computational rabbit-specific ventricular action potential models for investigating sources of variability in cellular repolarisation

Variability is observed at all levels of cardiac electrophysiology. Yet, the underlying causes and importance of this variability are generally unknown, and difficult to investigate with current experimental techniques. The aim of the present study was to generate populations of computational ventricular action potential models that reproduce experimentally observed intercellular variability of repolarisation (represented by action potential duration) and to identify its potential causes. A systematic exploration of the effects of simultaneously varying the magnitude of six transmembrane current conductances (transient outward, rapid and slow delayed rectifier K(+), inward rectifying K(+), L-type Ca(2+), and Na(+)/K(+) pump currents) in two rabbit-specific ventricular action potential models (Shannon et al. and Mahajan et al.) at multiple cycle lengths (400, 600, 1,000 ms) was performed. This was accomplished with distributed computing software specialised for multi-dimensional parameter sweeps and grid execution. An initial population of 15,625 parameter sets was generated for both models at each cycle length. Action potential durations of these populations were compared to experimentally derived ranges for rabbit ventricular myocytes. 1,352 parameter sets for the Shannon model and 779 parameter sets for the Mahajan model yielded action potential duration within the experimental range, demonstrating that a wide array of ionic conductance values can be used to simulate a physiological rabbit ventricular action potential. Furthermore, by using clutter-based dimension reordering, a technique that allows visualisation of multi-dimensional spaces in two dimensions, the interaction of current conductances and their relative importance to the ventricular action potential at different cycle lengths were revealed. Overall, this work represents an important step towards a better understanding of the role that variability in current conductances may play in experimentally observed intercellular variability of rabbit ventricular action potential repolarisation.

A two-Dimensional finite volume method for variable density flow and solute transport through saturated-unsaturated media

Extensive groundwater withdrawal has resulted in a severe seawater intrusion problem in the Gooburrum aquifers at Bundaberg, Queensland, Australia. Better management strategies can be implemented by understanding the seawater intrusion processes in those aquifers. To study the seawater intrusion process in the region, a two-dimensional density-dependent, saturated and unsaturated flow and transport computational model is used. The model consists of a coupled system of two non-linear partial differential equations. The first equation describes the flow of a variable-density fluid, and the second equation describes the transport of dissolved salt. A two-dimensional control volume finite element model is developed for simulating the seawater intrusion into the heterogeneous aquifer system at Gooburrum. The simulation results provide a realistic mechanism by which to study the convoluted transport phenomena evolving in this complex heterogeneous coastal aquifer.

A finite volume scheme with preconditioned Lanczos method for two-dimensional space-fractional reaction–diffusion equations

Fractional differential equations have been increasingly used as a powerful tool to model the non-locality and spatial heterogeneity inherent in many real-world problems. However, a constant challenge faced by researchers in this area is the high computational expense of obtaining numerical solutions of these fractional models, owing to the non-local nature of fractional derivatives. In this paper, we introduce a finite volume scheme with preconditioned Lanczos method as an attractive and high-efficiency approach for solving two-dimensional space-fractional reaction–diffusion equations. The computational heart of this approach is the efficient computation of a matrix-function-vector product f(A)bf(A)b, where A A is the matrix representation of the Laplacian obtained from the finite volume method and is non-symmetric. A key aspect of our proposed approach is that the popular Lanczos method for symmetric matrices is applied to this non-symmetric problem, after a suitable transformation. Furthermore, the convergence of the Lanczos method is greatly improved by incorporating a preconditioner. Our approach is show-cased by solving the fractional Fisher equation including a validation of the solution and an analysis of the behaviour of the model.

Two-dimensional bow and stern flows in a finite-depth fluid with constant vorticity

This thesis is concerned with two-dimensional free surface flows past semi-infinite surface-piercing bodies in a fluid of finite-depth. Throughout the study, it is assumed that the fluid in question is incompressible, and that the effects of viscosity and surface tension are negligible. The problems considered are physically important, since they can be used to model the flow of water near the bow or stern of a wide, blunt ship. Alternatively, the solutions can be interpreted as describing the flow into, or out of, a horizontal slot. In the past, all research conducted on this topic has been dedicated to the situation where the flow is irrotational. The results from such studies are extended here, by allowing the fluid to have constant vorticity throughout the flow domain. In addition, new results for irrotational flow are also presented. When studying the flow of a fluid past a surface-piercing body, it is important to stipulate in advance the nature of the free surface as it intersects the body. Three different possibilities are considered in this thesis. In the first of these possibilities, it is assumed that the free surface rises up and meets the body at a stagnation point. For this configuration, the nonlinear problem is solved numerically with the use of a boundary integral method in the physical plane. Here the semi-infinite body is assumed to be rectangular in shape, with a rounded corner. Supercritical solutions which satisfy the radiation condition are found for various values of the Froude number and the dimensionless vorticity. Subcritical solutions are also found; however these solutions violate the radiation condition and are characterised by a train of waves upstream. In the limit that the height of the body above the horizontal bottom vanishes, the flow approaches that due to a submerged line sink in a $90^\circ$ corner. This limiting problem is also examined as a special case. The second configuration considered in this thesis involves the free surface attaching smoothly to the front face of the rectangular shaped body. For this configuration, nonlinear solutions are computed using a similar numerical scheme to that used in the stagnant attachment case. It is found that these solution exist for all supercritical Froude numbers. The related problem of the cusp-like flow due to a submerged sink in a corner is also considered. Finally, the flow of a fluid emerging from beneath a semi-infinite flat plate is examined. Here the free surface is assumed to detach from the trailing edge of the plate horizontally. A linear problem is formulated under the assumption that the elevation of the plate is close to the undisturbed free surface level. This problem is solved exactly using the Wiener-Hopf technique, and subcritical solutions are found which are characterised by a train of sinusoidal waves in the far field. The nonlinear problem is also considered. Exact relations between certain parameters for supercritical flow are derived using conservation of mass and momentum arguments, and these are confirmed numerically. Nonlinear subcritical solutions are computed, and the results are compared to those predicted by the linear theory.

A three-dimensional hybrid smoothed finite element method (H-SFEM) for nonlinear solid mechanics problems

This paper presents a novel three-dimensional hybrid smoothed finite element method (H-SFEM) for solid mechanics problems. In 3D H-SFEM, the strain field is assumed to be the weighted average between compatible strains from the finite element method (FEM) and smoothed strains from the node-based smoothed FEM with a parameter α equipped into H-SFEM. By adjusting α, the upper and lower bound solutions in the strain energy norm and eigenfrequencies can always be obtained. The optimized α value in 3D H-SFEM using a tetrahedron mesh possesses a close-to-exact stiffness of the continuous system, and produces ultra-accurate solutions in terms of displacement, strain energy and eigenfrequencies in the linear and nonlinear problems. The novel domain-based selective scheme is proposed leading to a combined selective H-SFEM model that is immune from volumetric locking and hence works well for nearly incompressible materials. The proposed 3D H-SFEM is an innovative and unique numerical method with its distinct features, which has great potential in the successful application for solid mechanics problems.

A second order control-volume finite-element least-squares strategy for simulating diffusion in strongly anisotropic media

An unstructured mesh �nite volume discretisation method for simulating di�usion in anisotropic media in two-dimensional space is discussed. This technique is considered as an extension of the fully implicit hybrid control-volume �nite-element method and it retains the local continuity of the ux at the control volume faces. A least squares function recon- struction technique together with a new ux decomposition strategy is used to obtain an accurate ux approximation at the control volume face, ensuring that the overall accuracy of the spatial discretisation maintains second order. This paper highlights that the new technique coincides with the traditional shape function technique when the correction term is neglected and that it signi�cantly increases the accuracy of the previous linear scheme on coarse meshes when applied to media that exhibit very strong to extreme anisotropy ratios. It is concluded that the method can be used on both regular and irregular meshes, and appears independent of the mesh quality.

Linear stern waves in finite depth channels

This paper formulates an analytically tractable problem for the wake generated by a long flat bottom ship by considering the steady free surface flow of an inviscid, incompressible fluid emerging from beneath a semi-infinite rigid plate. The flow is considered to be irrotational and two-dimensional so that classical potential flow methods can be exploited. In addition, it is assumed that the draft of the plate is small compared to the depth of the channel. The linearised problem is solved exactly using a Fourier transform and the Wiener-Hopf technique, and it is shown that there is a family of subcritical solutions characterised by a train of sinusoidal waves on the downstream free surface. The amplitude of these waves decreases as the Froude number increases. Supercritical solutions are also obtained, but, in general, these have infinite vertical velocities at the trailing edge of the plate. Consideration of further terms in the expansions suggests a way of canceling the singularity for certain values of the Froude number.