Time-varying Risk Premiums and Conditional Market Risk: Empirical Evidence from European Stock Markets

This study investigates the relationship between the time-varying risk premiums and conditional market risk in the stock markets of the ten member countries of Economy and Monetary Union. Second, it examines whether the conditional second moments change over time and are there asymmetric effects in the conditional covariance matrix. Third, it analyzes the possible effects of the chosen testing framework. Empirical analysis is conducted using asymmetric univariate and multivariate GARCH-in-mean models and assuming three different degrees of market integration. For a daily sample period from 1999 to 2007, the study shows that the time-varying market risk alone is not enough to explain the dynamics of risk premiums and indications are found that the market risk is detected only when its price is allowed to change over time. Also asymmetric effects in the conditional covariance matrix, which is found to be time-varying, are clearly present and should be recognized in empirical asset pricing analyses.

Quantitative market and sales forecast accuracy analysis

The main objective of this master’s thesis was to quantitatively study the reliability of market and sales forecasts of a certain company by measuring bias, precision and accuracy of these forecasts by comparing forecasts against actual values. Secondly, the differences of bias, precision and accuracy between markets were explained by various macroeconomic variables and market characteristics. Accuracy and precision of the forecasts seems to vary significantly depending on the market that is being forecasted, the variable that is being forecasted, the estimation period, the length of the estimated period, the forecast horizon and the granularity of the data. High inflation, low income level and high year-on-year market volatility seems to be related with higher annual market forecast uncertainty and high year-on-year sales volatility with higher sales forecast uncertainty. When quarterly market size is forecasted, correlation between macroeconomic variables and forecast errors reduces. Uncertainty of the sales forecasts cannot be explained with macroeconomic variables. Longer forecasts are more uncertain, shorter estimated period leads to higher uncertainty, and usually more recent market forecasts are less uncertain. Sales forecasts seem to be more uncertain than market forecasts, because they incorporate both market size and market share risks. When lead time is more than one year, forecast risk seems to grow as a function of root forecast horizon. When lead time is less than year, sequential error terms are typically correlated, and therefore forecast errors are trending or mean-reverting. The bias of forecasts seems to change in cycles, and therefore the future forecasts cannot be systematically adjusted with it. The MASE cannot be used to measure whether the forecast can anticipate year-on-year volatility. Instead, we constructed a new relative accuracy measure to cope with this particular situation.

A comparison of electricity spot prices simulation using ARMA-GARCH and mean-reverting models

The aim of this work is to compare two families of mathematical models for their respective capability to capture the statistical properties of real electricity spot market time series. The first model family is ARMA-GARCH models and the second model family is mean-reverting Ornstein-Uhlenbeck models. These two models have been applied to two price series of Nordic Nord Pool spot market for electricity namely to the System prices and to the DenmarkW prices. The parameters of both models were calibrated from the real time series. After carrying out simulation with optimal models from both families we conclude that neither ARMA-GARCH models, nor conventional mean-reverting Ornstein-Uhlenbeck models, even when calibrated optimally with real electricity spot market price or return series, capture the statistical characteristics of the real series. But in the case of less spiky behavior (System prices), the mean-reverting Ornstein-Uhlenbeck model could be seen to partially succeeded in this task.

Interdependence of International Stock Markets, European Government Bond Market and Gold Market

This thesis examines the interdependence of international stock markets (the USA, Europe, Japan, emerging markets, and frontier markets), European government bond market, and gold market during the 21st century. Special focus is on the dynamics of the correlations between the markets, as well as on, spillovers in mean returns and volatility. The mean return spillovers are examined on the basis of the bivariate VAR(1) model, whereas the bivariate BEKK-GARCH(1, 1) model is employed for the analysis of the volatility spillovers. In order to analyze the spillover effects in different market conditions, the full sample period from 2000 to 2013 is divided into the pre-crisis period (2000–2006) and the crisis period (2007–2013). The results indicate an increasing interdependence especially within international stock markets during the periods of financial turbulence, and are thus consistent with the existing literature. Hence, bond and gold markets provide the best diversification benefits for equity investors, particularly during the periods of market turmoil.

Regime-Switching in the Impact of Oil Price Shocks on Stock Market Volatility: Evidence from Oil-Importing and Oil-Exporting Countries

Research has highlighted the adequacy of Markov regime-switching model to address dynamic behavior in long term stock market movements. Employing a purposed Extended regime-switching GARCH(1,1) model, this thesis further investigates the regime dependent nonlinear relationship between changes in oil price and stock market volatility in Saudi Arabia, Norway and Singapore for the period of 2001-2014. Market selection is prioritized to national dependency on oil export or import, which also rationalizes the fitness of implied bivariate volatility model. Among two regimes identified by the mean model, high stock market return-low volatility regime reflects the stable economic growth periods. The other regime characterized by low stock market return-high volatility coincides with episodes of recession and downturn. Moreover, results of volatility model provide the evidence that shocks in stock markets are less persistent during the high volatility regime. While accelerated oil price rises the stock market volatility during recessions, it reduces the stock market risk during normal growth periods in Singapore. In contrast, oil price showed no significant notable impact on stock market volatility of target oil-exporting countries in either of the volatility regime. In light to these results, international investors and policy makers could benefit the risk management in relation to oil price fluctuation.

Interdependence of Macroeconomics Variables, Stock Market Returns and Stock Market Volatility in Latin America

This thesis examines the interdependence of macroeconomic variables, stock market returns and stock market volatility in Latin America between 2000 and 2015. Argentina, Brazil, Chile, Colombia, Mexico and Peru were chosen as the sample markets, while inflation, interest rate, exchange rate, money supply, oil and gold were chosen as the sample macroeconomic variables. Bivariate VAR (1) model was applied to examine the mean return spillovers between the variables, whereas GARCH (1, 1) – BEKK model was applied to capture the volatility spillovers. The sample was divided into two smaller sub-periods, where the first sub-period covers from 2000 to 2007, and the second sub-period covers from 2007 to 2015. The empirical results report significant shock transmissions and volatility spillovers between inflation, interest rate, exchange rate, money supply, gold, oil and the selected markets, which suggests interdependence between the variables.

TAKING ADVANTAGE OF THE LOCAL ADVANTAGE? - Investment value of the analyst local advantage in the Finnish stock market in 2006–2014

An investor can either conduct independent analysis or rely on the analyses of others. Stock analysts provide markets with expectations regarding particular securities. However, analysts have different capabilities and resources, of which investors are seldom cognizant. The local advantage refers to the advantage stemming from cultural or geographical proximity to securities analyzed. The research has confirmed that local agents are generally more accurate or produce excess returns. This thesis tests the investment value of the local advantage regarding Finnish stocks via target price data. The empirical section investigates the local advantage from several aspects. It is discovered that local analysts were more focused on certain sectors generally located close to consumer markets. Market reactions to target price revisions were generally insignificant with the exception to local positive target prices. Both local and foreign target prices were overly optimistic and exhibited signs of herding. Neither group could be identified as a leader or follower of new information. Additionally, foreign price change expectations were more in line with the quantitative models and ideas such as beta or return mean reversion. The locals were more accurate than foreign analysts in 5 out of 9 sectors and vice versa in one. These sectors were somewhat in line with coverage decisions and buttressed the idea of local advantage stemming from proximity to markets, not to headquarters. The accuracy advantage was dependent on sample years and on the measure used. Local analysts ranked magnitudes of price changes more accurately in optimistic and foreign analysts in pessimistic target prices. Directional accuracy of both groups was under 50% and target prices held no linear predictive power. Investment value of target prices were tested by forming mean-variance efficient portfolios. Parallel to differing accuracies in the levels of expectations foreign portfolio performed better when short sales were allowed and local better when disallowed. Both local and non-local portfolios performed worse than a passive index fund, albeit not statistically significantly. This was in line with previously reported low overall accuracy and different accuracy profiles. Refraining from estimating individual stock returns altogether produced statistically significantly higher Sharpe ratios compared to local or foreign portfolios. The proposed method of testing the investment value of target prices of different groups suffered from some inconsistencies. Nevertheless, these results are of interest to investors seeking the advice of security analysts.

Stochastic particle models: mean reversion and burgers dynamics. An application to commodity markets

The aim of this study is to propose a stochastic model for commodity markets linked with the Burgers equation from fluid dynamics. We construct a stochastic particles method for commodity markets, in which particles represent market participants. A discontinuity in the model is included through an interacting kernel equal to the Heaviside function and its link with the Burgers equation is given. The Burgers equation and the connection of this model with stochastic differential equations are also studied. Further, based on the law of large numbers, we prove the convergence, for large N, of a system of stochastic differential equations describing the evolution of the prices of N traders to a deterministic partial differential equation of Burgers type. Numerical experiments highlight the success of the new proposal in modeling some commodity markets, and this is confirmed by the ability of the model to reproduce price spikes when their effects occur in a sufficiently long period of time.

TAKING ADVANTAGE OF THE LOCAL ADVANTAGE? - Investment value of the analyst local advantage in the Finnish stock market in 2006–2014

An investor can either conduct independent analysis or rely on the analyses of others. Stock analysts provide markets with expectations regarding particular securities. However, analysts have different capabilities and resources, of which investors are seldom cognizant. The local advantage refers to the advantage stemming from cultural or geographical proximity to securities analyzed. The research has confirmed that local agents are generally more accurate or produce excess returns. This thesis tests the investment value of the local advantage regarding Finnish stocks via target price data. The empirical section investigates the local advantage from several aspects. It is discovered that local analysts were more focused on certain sectors generally located close to consumer markets. Market reactions to target price revisions were generally insignificant with the exception to local positive target prices. Both local and foreign target prices were overly optimistic and exhibited signs of herding. Neither group could be identified as a leader or follower of new information. Additionally, foreign price change expectations were more in line with the quantitative models and ideas such as beta or return mean reversion. The locals were more accurate than foreign analysts in 5 out of 9 sectors and vice versa in one. These sectors were somewhat in line with coverage decisions and buttressed the idea of local advantage stemming from proximity to markets, not to headquarters. The accuracy advantage was dependent on sample years and on the measure used. Local analysts ranked magnitudes of price changes more accurately in optimistic and foreign analysts in pessimistic target prices. Directional accuracy of both groups was under 50% and target prices held no linear predictive power. Investment value of target prices were tested by forming mean-variance efficient portfolios. Parallel to differing accuracies in the levels of expectations foreign portfolio performed better when short sales were allowed and local better when disallowed. Both local and non-local portfolios performed worse than a passive index fund, albeit not statistically significantly. This was in line with previously reported low overall accuracy and different accuracy profiles. Refraining from estimating individual stock returns altogether produced statistically significantly higher Sharpe ratios compared to local or foreign portfolios. The proposed method of testing the investment value of target prices of different groups suffered from some inconsistencies. Nevertheless, these results are of interest to investors seeking the advice of security analysts.

Testing for granger-causality in the Finnish roundwood market

Summary

Logistic services as competitive means : segmenting the retail market for softwood lumber

Abstract

Land use response to agricultural policy and market movements on Finnish dairy-farms

Selostus: Tuki- ja hintamuutosten vaikutus maitotilojen pellon käyttöön