Volatility forecasting for risk management

Recent research has suggested that forecast evaluation on the basis of standard statistical loss functions could prefer models which are sub-optimal when used in a practical setting. This paper explores a number of statistical models for predicting the daily volatility of several key UK financial time series. The out-of-sample forecasting performance of various linear and GARCH-type models of volatility are compared with forecasts derived from a multivariate approach. The forecasts are evaluated using traditional metrics, such as mean squared error, and also by how adequately they perform in a modern risk management setting. We find that the relative accuracies of the various methods are highly sensitive to the measure used to evaluate them. Such results have implications for any econometric time series forecasts which are subsequently employed in financial decisionmaking.

I and I: immunity to error through misidentification of the subject

Abstract I argue for the following claims: [1] all uses of I (the word ‘I’ or thought-element I) are absolutely immune to error through misidentification relative to I. [2] no genuine use of I can fail to refer. Nevertheless [3] I isn’t univocal: it doesn’t always refer to the same thing, or kind of thing, even in the thought or speech of a single person. This is so even though [4] I always refers to its user, the subject of experience who speaks or thinks, and although [5] if I’m thinking about something specifically as myself, I can’t fail to be thinking of myself, and although [6] a genuine understanding use of I always involves the subject thinking of itself as itself, whatever else it does or doesn’t involve, and although [7] if I take myself to be thinking about myself, then I am thinking about myself.

Validation of the FALL3D ash dispersion model using observations of the 2010 Eyjafjallajökull volcanic ash clouds

During April-May 2010 volcanic ash clouds from the Icelandic Eyjafjallajökull volcano reached Europe causing an unprecedented disruption of the EUR/NAT region airspace. Civil aviation authorities banned all flight operations because of the threat posed by volcanic ash to modern turbine aircraft. New quantitative airborne ash mass concentration thresholds, still under discussion, were adopted for discerning regions contaminated by ash. This has implications for ash dispersal models routinely used to forecast the evolution of ash clouds. In this new context, quantitative model validation and assessment of the accuracies of current state-of-the-art models is of paramount importance. The passage of volcanic ash clouds over central Europe, a territory hosting a dense network of meteorological and air quality observatories, generated a quantity of observations unusual for volcanic clouds. From the ground, the cloud was observed by aerosol lidars, lidar ceilometers, sun photometers, other remote-sensing instru- ments and in-situ collectors. From the air, sondes and multiple aircraft measurements also took extremely valuable in-situ and remote-sensing measurements. These measurements constitute an excellent database for model validation. Here we validate the FALL3D ash dispersal model by comparing model results with ground and airplane-based measurements obtained during the initial 14e23 April 2010 Eyjafjallajökull explosive phase. We run the model at high spatial resolution using as input hourly- averaged observed heights of the eruption column and the total grain size distribution reconstructed from field observations. Model results are then compared against remote ground-based and in-situ aircraft-based measurements, including lidar ceilometers from the German Meteorological Service, aerosol lidars and sun photometers from EARLINET and AERONET networks, and flight missions of the German DLR Falcon aircraft. We find good quantitative agreement, with an error similar to the spread in the observations (however depending on the method used to estimate mass eruption rate) for both airborne and ground mass concentration. Such verification results help us understand and constrain the accuracy and reliability of ash transport models and it is of enormous relevance for designing future operational mitigation strategies at Volcanic Ash Advisory Centers.

Selecting from amongst non–nested conditional variance models: information criteria and portfolio determination

We consider the finite sample properties of model selection by information criteria in conditionally heteroscedastic models. Recent theoretical results show that certain popular criteria are consistent in that they will select the true model asymptotically with probability 1. To examine the empirical relevance of this property, Monte Carlo simulations are conducted for a set of non–nested data generating processes (DGPs) with the set of candidate models consisting of all types of model used as DGPs. In addition, not only is the best model considered but also those with similar values of the information criterion, called close competitors, thus forming a portfolio of eligible models. To supplement the simulations, the criteria are applied to a set of economic and financial series. In the simulations, the criteria are largely ineffective at identifying the correct model, either as best or a close competitor, the parsimonious GARCH(1, 1) model being preferred for most DGPs. In contrast, asymmetric models are generally selected to represent actual data. This leads to the conjecture that the properties of parameterizations of processes commonly used to model heteroscedastic data are more similar than may be imagined and that more attention needs to be paid to the behaviour of the standardized disturbances of such models, both in simulation exercises and in empirical modelling.

The role of the log transformation in forecasting economic variables

For forecasting and economic analysis many variables are used in logarithms (logs). In time series analysis, this transformation is often considered to stabilize the variance of a series. We investigate under which conditions taking logs is beneficial for forecasting. Forecasts based on the original series are compared to forecasts based on logs. For a range of economic variables, substantial forecasting improvements from taking logs are found if the log transformation actually stabilizes the variance of the underlying series. Using logs can be damaging for the forecast precision if a stable variance is not achieved.

Implications of non-cylindrical flux ropes for magnetic cloud reconstruction techniques and the interpretation of double flux rope events

Magnetic clouds (MCs) are a subset of interplanetary coronal mass ejections (ICMEs) which exhibit signatures consistent with a magnetic flux rope structure. Techniques for reconstructing flux rope orientation from single-point in situ observations typically assume the flux rope is locally cylindrical, e.g., minimum variance analysis (MVA) and force-free flux rope (FFFR) fitting. In this study, we outline a non-cylindrical magnetic flux rope model, in which the flux rope radius and axial curvature can both vary along the length of the axis. This model is not necessarily intended to represent the global structure of MCs, but it can be used to quantify the error in MC reconstruction resulting from the cylindrical approximation. When the local flux rope axis is approximately perpendicular to the heliocentric radial direction, which is also the effective spacecraft trajectory through a magnetic cloud, the error in using cylindrical reconstruction methods is relatively small (≈ 10∘). However, as the local axis orientation becomes increasingly aligned with the radial direction, the spacecraft trajectory may pass close to the axis at two separate locations. This results in a magnetic field time series which deviates significantly from encounters with a force-free flux rope, and consequently the error in the axis orientation derived from cylindrical reconstructions can be as much as 90∘. Such two-axis encounters can result in an apparent ‘double flux rope’ signature in the magnetic field time series, sometimes observed in spacecraft data. Analysing each axis encounter independently produces reasonably accurate axis orientations with MVA, but larger errors with FFFR fitting.

Capital market expectations and the London office market

The analysis of office market dynamics has generally concentrated on the impact of underlying fundamental demand and supply variables. This paper takes a slightly different approach to many previous examinations of rental dynamics. Within a Vector-Error-Correction framework the empirical analysis concentrates upon the impact of economic and financial variables on rents in the City of London and West End of London office markets. The impulse response and variance decomposition reveal that while lagged rental values and key demand drivers play a highly important role in the dynamics of rents, financial variables are also influential. Stock market performance not only influences the City of London market but also the West End, whilst the default spread plays an important role in recent years. It is argued that both series incorporate expectations about future economic performance and that this is the basis of their influence upon rental values.

TIGGE: comparison of the prediction of Southern Hemisphere extratropical cyclones by different ensemble prediction systems.

The prediction of Northern Hemisphere (NH) extratropical cyclones by nine different ensemble prediction systems(EPSs), archived as part of The Observing System Research and Predictability Experiment (THORPEX) Interactive Grand Global Ensemble (TIGGE), has recently been explored using a cyclone tracking approach. This paper provides a continuation of this work, extending the analysis to the Southern Hemisphere (SH). While the EPSs have larger error in all cyclone properties in the SH, the relative performance of the different EPSs remains broadly consistent between the two hemispheres. Some interesting differences are also shown. The Chinese Meteorological Administration (CMA) EPS has a significantly lower level of performance in the SH compared to the NH. Previous NH results showed that the Centro de Previsao de Tempo e Estudos Climaticos (CPTEC) EPS underpredicts cyclone intensity. The results of this current study show that this bias is significantly larger in the SH. The CPTEC EPS also has very little spread in both hemispheres. As with the NH results, cyclone propagation speed is underpredicted by all the EPSs in the SH. To investigate this further, the bias was also computed for theECMWFhigh-resolution deterministic forecast. The bias was significantly smaller than the lower resolution ECMWF EPS.

Estimation of systematic error in an equatorial ocean model using data assimilation

Assimilation of temperature observations into an ocean model near the equator often results in a dynamically unbalanced state with unrealistic overturning circulations. The way in which these circulations arise from systematic errors in the model or its forcing is discussed. A scheme is proposed, based on the theory of state augmentation, which uses the departures of the model state from the observations to update slowly evolving bias fields. Results are summarized from an experiment applying this bias correction scheme to an ocean general circulation model. They show that the method produces more balanced analyses and a better fit to the temperature observations.