Risk management under a two-factor model of the term structure of interest rates

This paper presents several applications to interest rate risk managementbased on a two-factor continuous-time model of the term structure of interestrates previously presented in Moreno (1996). This model assumes that defaultfree discount bond prices are determined by the time to maturity and twofactors, the long-term interest rate and the spread (difference between thelong-term rate and the short-term (instantaneous) riskless rate). Several newmeasures of ``generalized duration" are presented and applied in differentsituations in order to manage market risk and yield curve risk. By means ofthese measures, we are able to compute the hedging ratios that allows us toimmunize a bond portfolio by means of options on bonds. Focusing on thehedging problem, it is shown that these new measures allow us to immunize abond portfolio against changes (parallel and/or in the slope) in the yieldcurve. Finally, a proposal of solution of the limitations of conventionalduration by means of these new measures is presented and illustratednumerically.

A two-mean reverting-factor model of the term structure of interest rates

This paper presents a two--factor model of the term structure ofinterest rates. We assume that default free discount bond prices aredetermined by the time to maturity and two factors, the long--term interestrate and the spread (difference between the long--term rate and theshort--term (instantaneous) riskless rate). Assuming that both factorsfollow a joint Ornstein--Uhlenbeck process, a general bond pricing equationis derived. We obtain a closed--form expression for bond prices andexamine its implications for the term structure of interest rates. We alsoderive a closed--form solution for interest rate derivatives prices. Thisexpression is applied to price European options on discount bonds andmore complex types of options. Finally, empirical evidence of the model'sperformance is presented.

Generalized factor models: a bayesian approach

There is recent interest in the generalization of classical factor models in which the idiosyncratic factors are assumed to be orthogonal and there are identification restrictions on cross-sectional and time dimensions. In this study, we describe and implement a Bayesian approach to generalized factor models. A flexible framework is developed to determine the variations attributed to common and idiosyncratic factors. We also propose a unique methodology to select the (generalized) factor model that best fits a given set of data. Applying the proposed methodology to the simulated data and the foreign exchange rate data, we provide a comparative analysis between the classical and generalized factor models. We find that when there is a shift from classical to generalized, there are significant changes in the estimates of the structures of the covariance and correlation matrices while there are less dramatic changes in the estimates of the factor loadings and the variation attributed to common factors.

Asset pricing implications of benchmarking: A two-factor CAPM

In this paper we consider the equilibrium effects of an institutionalinvestor whose performance is benchmarked to an index. In a partialequilibrium setting, the objective of the institutional investor is modeledas the maximization of expected utility (an increasing and concave function,in order to accommodate risk aversion) of final wealth minus a benchmark.In equilibrium this optimal strategy gives rise to the two-beta CAPM inBrennan (1993): together with the market beta a new risk-factor (that wecall active management risk) is brought into the analysis. This new betais deffined as the normalized (to the benchmark's variance) covariancebetween the asset excess return and the excess return of the market overthe benchmark index. Different to Brennan, the empirical test supports themodel's predictions. The cross-section return on the active management riskis positive and signifficant especially after 1990, when institutionalinvestors have become the representative agent of the market.

Improving electricity market price scenarios by means of forecasting factor models

In liberalized electricity markets, generation Companies must build an hourly bidthat is sent to the market operator. The price at which the energy will be paid is unknown during the bidding process and has to be forecast. In this work we apply forecasting factor models to this framework and study its suitability.

Comparative study of two needle models in terms of deflection during inferior alveolar nerve block

Objectives: The purpose of this study is to determine the possible differences in deflection between two needles of same length and external gauge but with different internal gauges during truncal block of the inferior alveolar nerve. The initial working hypothesis was that greater deflection may be expected with larger internal gauge needles. Study design: Four clinicians subjected 346 patients to inferior alveolar nerve block and infiltrating anesthesia of the buccal nerve trajectory for the surgical or conventional extraction of the lower third molar. A nonautoaspirating syringe system with 2 types of needle was used: a standard 27-gauge x 35-mm needle with an internal gauge of 0.215 mm or an XL Monoprotect® 27-gauge x 35-mm needle with an internal gauge of 0.265 mm. The following information was systematically recorded for each patient: needle type, gender, anesthetic technique (direct or indirect truncal block) and the number of bone contacts during the procedure, the patient-extraction side, the practitioner performing the technique, and blood aspiration (either positive or negative). Results: 346 needles were used in total. 190 were standard needles (27-gauge x 35-mm needle with an internal gauge of 0.215 mm) and 156 were XL Monoprotect®. Incidence of deflection was observed in 49.1% of cases (170 needles) where 94 were standard needles and 76 XL Monoprotect®. Needle torsion ranged from 0º and 6º. Conclusions: No significant differences were recorded in terms of deflection and internal gauge, operator, patient-extraction side, the anesthetic technique involved and the number of bone contacts during the procedure

On the relevance of modeling volatility for pricing purposes

This paper presents a two-factor (Vasicek-CIR) model of the term structure of interest rates and develops its pricing and empirical properties. We assume that default free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate and the spread. Assuming a certain process for both factors, a general bond pricing equation is derived and a closed-form expression for bond prices is obtained. Empirical evidence of the model's performance in comparisson with a double Vasicek model is presented. The main conclusion is that the modeling of the volatility in the long-term rate process can help (in a large amount) to fit the observed data can improve - in a reasonable quantity - the prediction of the future movements in the medium- and long-term interest rates. However, for shorter maturities, it is shown that the pricing errors are, basically, negligible and it is not so clear which is the best model to be used.

Territorio en mutación: la industria textil-confección como factor de desarrollo local en Galicia

La industria textil y de la confección ha experimentado en Galicia un muy notable proceso de expansión en las últimas décadas. Esta actividad se localiza de modo específico en determinadas localidades y espacios, donde se configuran sistemas productivos locales, mientras en el resto su presencia es más débil. Otra de las características del sector es el contraste existente entre dos modelos empresariales: el vinculado al grupo multinacional Inditex y aquel asociado a un grupo de empresas de menor entidad, pero de gran capacidad competitiva en los segmentos de calidad asociados al diseño. El presente análisis presenta como objetivos: presentar las estrategias empresariales de los dos mode los productivos existentes, individualizar aquellos factores de carácter socioeconómico y territorial que han favorecido el desarrollo de la actividad e identificar las principales implicaciones territoriales que el sector ha generado en aquellas localidades donde su presencia es más significativa.

Older people's university students in Spain: a comparison of motives and benefits between two models

This study examines both the motives for and the benefits of attending a uni- versity programme for older people (UPOP) in Spain, and how they vary with the type of UPOP. Two UPOP models were assessed: The"Older People"s Classes" of the University of Barcelona, which is organised as a lecture course, and the"University of Experience" at the University of Valencia, which is a three- or four- year variant of regular university degrees. A sample of 321 older students (mean age 67.5 years) was gathered from the two UPOPs, 161 participants from the former and 157 from the latter. The findings suggest that expressive motives such as acquiring knowledge, expanding the mind or learning for the joy of learning were the most important reasons for joining a UPOP, and that among the perceived benefits from taking classes at university featured"gaining more friends","enhanced self or life-satisfaction" and"joy in life". Perceived benefits were particularly high among the less educated and the older students. While students participating in the Older People"s Classes were older and included relatively more women, differences between the two models in motives and benefits did not exist or were slight. These results are discussed in the context of new strategies to improve university courses aimed at older students.

Epidemic models with an infected-infectious period

The introduction of an infective-infectious period on the geographic spread of epidemics is considered in two different models. The classical evolution equations arising in the literature are generalized and the existence of epidemic wave fronts is revised. The asymptotic speed is obtained and improves previous results for the Black Death plague

Improved estimation of the covariance matrix of stock returns with an application to portofolio selection

This paper proposes to estimate the covariance matrix of stock returnsby an optimally weighted average of two existing estimators: the samplecovariance matrix and single-index covariance matrix. This method isgenerally known as shrinkage, and it is standard in decision theory andin empirical Bayesian statistics. Our shrinkage estimator can be seenas a way to account for extra-market covariance without having to specifyan arbitrary multi-factor structure. For NYSE and AMEX stock returns from1972 to 1995, it can be used to select portfolios with significantly lowerout-of-sample variance than a set of existing estimators, includingmulti-factor models.

Hierarchical location-allocation models for congested systems

In this paper we address the issue of locating hierarchical facilities in the presence of congestion. Two hierarchical models are presented, where lower level servers attend requests first, and then, some of the served customers are referred to higher level servers. In the first model, the objective is to find the minimum number of servers and theirlocations that will cover a given region with a distance or time standard. The second model is cast as a Maximal Covering Location formulation. A heuristic procedure is then presented together with computational experience. Finally, some extensions of these models that address other types of spatial configurations are offered.

Predicción de la resistencia al flujo en ríos de montaña

Se han calibrado, validado y comparado tres modelos de resistencia al flujo de contorno granular: un modelo potencial y otros dos modelos desarrollados para condiciones de alta rugosidad relativa (uno basado en una modificación de la ley logarítmica de Prandtl-von Karman y otro fundamentado en un perfil de velocidad configurado en dos zonas: una uniforme en las proximidades de los elementos de rugosidad y otra superior que sigue una distribución logarítmica). Se ha empleado para ello un numeroso conjunto de 1.533 datos tomados en ríos y en canales de laboratorio, representativo de un amplio intervalo hidráulico y geomorfológico en el ámbito de ríos de grava y de montaña. Han resultado preferibles las ecuaciones ajustadas con los percentiles granulométricos mayores (d90 o d84) que las ajustadas con el diámetro mediano (d50), debido a la mayor capacidad explicativa alcanzada dado un modelo, la menor diferencia en la bondad de ajuste entre los diferentes modelos y la menor influencia del origen de los datos (río o canal de laboratorio). Las ecuaciones ajustadas de acuerdo con los modelos en donde se contemplan condiciones de alta rugosidad relativa presentan predicciones similares, exceptuando el intervalo macrorrugoso (y/d90 < 1), en el que es preferible la correspondiente al modelo fundamentado en el perfil de velocidad configurado en dos zonas. Se recomienda restringir la aplicación de la ecuación ajustada con arreglo a la ley potencial al intervalo de y/d90 comprendido entre uno y veinte, puesto que fuera de dicho intervalo tiende a infraestimar notablemente la resistencia al flujo.

Stability and asymptotic analysis of a fluid-particle interaction model

We are interested in coupled microscopic/macroscopic models describing the evolution of particles dispersed in a fluid. The system consists in a Vlasov-Fokker-Planck equation to describe the microscopic motion of the particles coupled to the Euler equations for a compressible fluid. We investigate dissipative quantities, equilibria and their stability properties and the role of external forces. We also study some asymptotic problems, their equilibria and stability and the derivation of macroscopic two-phase models.

Growth, habit formation, and catching-up\ with the Joneses

When habits are introduced multiplicatively in a capital accumulation model, the consumers' objective function might fail to be concave. In this paper we provide conditions aimed at guaranteeing the existence of interior solutions to the consumers' problem. We also characterize the equilibrium path of two growth models with multiplicative habits: the internal habit formation model, where individual habits coincide with own past consumption, and the external habit formation (or catching-up with the Joneses) model, where habits arise from the average past consumption in the economy. We show that the introduction of external habits makes the equilibrium path inefficient during the transition towards the balanced growth path. We characterize in this context the optimal tax policy.