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.

A boundary preserving numerical algorithm for the Wright-Fisher model with mutation

The Wright-Fisher model is an Itô stochastic differential equation that was originally introduced to model genetic drift within finite populations and has recently been used as an approximation to ion channel dynamics within cardiac and neuronal cells. While analytic solutions to this equation remain within the interval [0,1], current numerical methods are unable to preserve such boundaries in the approximation. We present a new numerical method that guarantees approximations to a form of Wright-Fisher model, which includes mutation, remain within [0,1] for all time with probability one. Strong convergence of the method is proved and numerical experiments suggest that this new scheme converges with strong order 1/2. Extending this method to a multidimensional case, numerical tests suggest that the algorithm still converges strongly with order 1/2. Finally, numerical solutions obtained using this new method are compared to those obtained using the Euler-Maruyama method where the Wiener increment is resampled to ensure solutions remain within [0,1].

City relative price dynamics in Australia : are structural breaks important?

This paper examines the dynamic behaviour of relative prices across seven Australian cities by applying panel unit root test procedures with structural breaks to quarterly consumer price index data for 1972 Q1–2011 Q4. We find overwhelming evidence of convergence in city relative prices. Three common structural breaks are endogenously determined at 1985, 1995, and 2007. Further, correcting for two potential biases, namely Nickell bias and time aggregation bias, we obtain half-life estimates of 2.3–3.8 quarters that are much shorter than those reported by previous research. Thus, we conclude that both structural breaks and bias corrections are important to obtain shorter half-life estimates.

System dynamics model of the knowledge management process

To effectively manage the challenges being faced by construction organisations in a fast changing business environment, many organisations are attempting to integrate knowledge management (KM) into their business operations. KM activities interact with each other and form a process which receives input from its internal business environment and produces outputs that should be justified by its business performance. This paper aims to provide further understanding on the dynamic nature of the KM process. Through a combination of path analysis and system dynamic simulation, this study found that: 1) an improved business performance enables active KM activities and provide feedback and guidance for formulating learning-based policies; and 2) effective human resource recruitment policies can enlarge the pool of individual knowledge, which lead to a more conducive internal business environment, as well as a higher KM activity level. Consequently, the desired business performance level can be reached within a shorter time frame.

Numerical evaluation of pollutant dispersion at a toll plaza based on system dynamics and Computational Fluid Dynamics models

The health of tollbooth workers is seriously threatened by long-term exposure to polluted air from vehicle exhausts. Using traffic data collected at a toll plaza, vehicle movements were simulated by a system dynamics model with different traffic volumes and toll collection procedures. This allowed the average travel time of vehicles to be calculated. A three-dimension Computational Fluid Dynamics (CFD) model was used with a k–ε turbulence model to simulate pollutant dispersion at the toll plaza for different traffic volumes and toll collection procedures. It was shown that pollutant concentration around tollbooths increases as traffic volume increases. Whether traffic volume is low or high (1500 vehicles/h or 2500 vehicles/h), pollutant concentration decreases if electronic toll collection (ETC) is adopted. In addition, pollutant concentration around tollbooths decreases as the proportion of ETC-equipped vehicles increases. However, if the proportion of ETC-equipped vehicles is very low and the traffic volume is not heavy, then pollutant concentration increases as the number of ETC lanes increases.

A test of the job demands : resources model with HIV/AIDS volunteers

Burnout has been identified as a significant factor in HIV/AIDS volunteering. It has been associated with depression, anxiety and the loss of volunteers from the health care delivery system. The aim of this study was to test the independence of the health and motivational processes hypothesized within the Job Demands – Resources model of burnout in HIV/AIDS volunteers. Participants were 307 HIV/AIDS volunteers from state AIDS Councils throughout Australia who completed self-report measures pertaining to role ambiguity and role conflict, social support, burnout, intrinsic and organizational satisfaction, and depression. Findings suggested that the independence of the dual processes hypothesized by the model was only partially supported. These findings provide a model for burnout which gives a framework for interventions at both the individual and organizational level which would contribute to the prevention of burnout, depression, and job dissatisfaction in HIV/AIDS volunteers.

A state-aware RFID privacy model with reader corruption

A number of security models have been proposed for RFID systems. Recent studies show that current models tend to be limited in the number of properties they capture. Consequently, models are commonly unable to distinguish between protocols with regard to finer privacy properties. This paper proposes a privacy model that introduces previously unavailable expressions of privacy. Based on the well-studied notion of indistinguishability, the model also strives to be simpler, easier to use, and more intuitive compared to previous models.

A state-aware RFID privacy model with reader corruption

A number of security models have been proposed for RFID systems. Recent studies show that current models tend to be limited in the number of properties they capture. Consequently, models are commonly unable to distinguish between protocols with regard to finer privacy properties. This paper proposes a privacy model that introduces previously unavailable expressions of privacy. Based on the well-studied notion of indistinguishability, the model also strives to be simpler, easier to use, and more intuitive compared to previous models.

Revisiting the GameFlow model with detailed heuristics

The GameFlow model strives to be a general model of player enjoyment, applicable to all game genres and platforms. Derived from a general set of heuristics for creating enjoyable player experiences, the GameFlow model has been widely used in evaluating many types of games, as well as non-game applications. However, we recognize that more specific, low-level, and implementable criteria are potentially more useful for designing and evaluating video games. Consequently, the research reported in this paper aims to provide detailed heuristics for designing and evaluating one specific game genre, real-time strategy games. In order to develop these heuristics, we conducted a grounded theoretical analysis on a set of professional game reviews and structured the resulting heuristics using the GameFlow model. A selection of the resulting 165 heuristics are presented in this paper and discussed with respect to key evaluations of the GameFlow model.

A porcine deep dermal partial thickness burn model with hypertrophic scarring

We developed a reproducible model of deep dermal partial thickness burn injury in juvenile Large White pigs. The contact burn is created using water at 92 degrees C for 15s in a bottle with the bottom replaced with plastic wrap. The depth of injury was determined by a histopathologist who examined tissue sections 2 and 6 days after injury in a blinded manner. Upon creation, the circular wound area developed white eschar and a hyperaemic zone around the wound border. Animals were kept for 6 weeks or 99 days to examine the wound healing process. The wounds took between 3 and 5 weeks for complete re-epithelialisation. Most wounds developed contracted, purple, hypertrophic scars. On measurement, the thickness of the burned skin was approximately 1.8 times that of the control skin at week 6 and approximately 2.2 times thicker than control skin at 99 days after injury. We have developed various methods to assess healing wounds, including digital photographic analysis, depth of organising granulation tissue, immunohistochemistry, electron microscopy and tensiometry. Immunohistochemistry and electron microscopy showed that our porcine hypertrophic scar appears similar to human hypertrophic scarring. The development of this model allows us to test and compare different treatments on burn wounds.

Spatially-explicit modelling of grassland classes - an improved method of integrating a climate-based classification model with interpolated climate surfaces

Spatially-explicit modelling of grassland classes is important to site-specific planning for improving grassland and environmental management over large areas. In this study, a climate-based grassland classification model, the Comprehensive and Sequential Classification System (CSCS) was integrated with spatially interpolated climate data to classify grassland in Gansu province, China. The study area is characterized by complex topographic features imposed by plateaus, high mountains, basins and deserts. To improve the quality of the interpolated climate data and the quality of the spatial classification over this complex topography, three linear regression methods, namely an analytic method based on multiple regression and residues (AMMRR), a modification of the AMMRR method through adding the effect of slope and aspect to the interpolation analysis (M-AMMRR) and a method which replaces the IDW approach for residue interpolation in M-AMMRR with an ordinary kriging approach (I-AMMRR), for interpolating climate variables were evaluated. The interpolation outcomes from the best interpolation method were then used in the CSCS model to classify the grassland in the study area. Climate variables interpolated included the annual cumulative temperature and annual total precipitation. The results indicated that the AMMRR and M-AMMRR methods generated acceptable climate surfaces but the best model fit and cross validation result were achieved by the I-AMMRR method. Twenty-six grassland classes were classified for the study area. The four grassland vegetation classes that covered more than half of the total study area were "cool temperate-arid temperate zonal semi-desert", "cool temperate-humid forest steppe and deciduous broad-leaved forest", "temperate-extra-arid temperate zonal desert", and "frigid per-humid rain tundra and alpine meadow". The vegetation classification map generated in this study provides spatial information on the locations and extents of the different grassland classes. This information can be used to facilitate government agencies' decision-making in land-use planning and environmental management, and for vegetation and biodiversity conservation. The information can also be used to assist land managers in the estimation of safe carrying capacities which will help to prevent overgrazing and land degradation.