Stochastic volatility jump-diffusions for European equity index dynamics

Major research on equity index dynamics has investigated only US indices (usually the S&P 500) and has provided contradictory results. In this paper a clarification and extension of that previous research is given. We find that European equity indices have quite different dynamics from the S&P 500. Each of the European indices considered may be satisfactorily modelled using either an affine model with price and volatility jumps or a GARCH volatility process without jumps. The S&P 500 dynamics are much more difficult to capture in a jump-diffusion framework.

Data dilemmas in forecasting European office market rents

This paper uses data provided by three major real estate advisory firms to investigate the level and pattern of variation in the measurement of historic real estate rental values for the main European office centres. The paper assesses the extent to which the data providing organizations agree on historic market performance in terms of returns, risk and timing and examines the relationship between market maturity and agreement. The analysis suggests that at the aggregate level and for many markets, there is substantial agreement on direction, quantity and timing of market change. However, there is substantial variability in the level of agreement among cities. The paper also assesses whether the different data sets produce different explanatory models and market forecast. It is concluded that, although disagreement on the direction of market change is high for many market, the different data sets often produce similar explanatory models and predict similar relative performance.

Expert judgement in the processes of commercial property market forecasting

In this paper we investigate the role of judgement in the formation of forecasts in commercial real estate markets. Based on interview surveys with the majority of forecast producers, we find that real estate forecasters are using a range of inputs and data sets to form models to predict an array of variables for a range of locations. The findings suggest that forecasts need to be acceptable to their users (and purchasers) and consequently forecasters generally have incentives to avoid presenting contentious or conspicuous forecasts. Where extreme forecasts are generated by a model, forecasters often engage in ‘self-censorship’ or are ‘censored’ following in-house consultation. It is concluded that the forecasting process is more complex than merely carrying out econometric modelling and that the impact of the influences within this process vary considerably across different organizational contexts.

Forecasting the future: an overview of the strategic planning of the Bournemouth and Poole conurbation

An important part of strategic planning’s purpose should be to attempt to forecast the future, not simply to belatedly respond to events, or accept the future as inevitable. This paper puts forward a conceptual approach for seeking to achieve these aims and uses the Bournemouth and Poole area in Dorset as a vehicle for applying the basic methodology. The area has been chosen because of the significant issues that it currently faces in planning terms; and its future development possibilities. In order that alternative future choices for the area – different ‘developmental trajectories’ – can be evaluated, they must be carefully and logically constructed. Four Futures for Bournemouth/Poole have been put forward; they are titled and colour-coded: Future One is Maximising Growth – Golden Prospect which seeks to achieve the highest level of economic prosperity of the area; Future Two is Incremental Growth – Solid Silver which attempts to facilitate a steady, continuing, controlled pattern of the development for the area; Future Three is Steady State – Cobalt Blue which suggests that people in the area could be more concerned with preserving their quality of life in terms of their leisure and recreation rather than increasing wealth; Future Four is Environment First – Jade Green which makes the area’s environmental protection its top priority even at the possible expense of economic prosperity. The scenarios proposed here are not sacrosanct. Nor are they simply confined to the Bournemouth and Poole area. In theory, suitably modified, they could use in a variety of different contexts. Consideration of the scenarios – wherever located - might then generate other, additional scenarios. These are called hybrids, alloys and amalgams. Likewise it might identify some of them as inappropriate or impossible. Most likely, careful consideration of the scenarios will suggest hybrid scenarios, in which features from different scenarios are combined to produce alternative or additional futures for consideration. The real issue then becomes how best to fashion such a future for the particular area under consideration

Forecasting UK real estate cycle phases with leading indicators: a probit approach

This paper examines the significance of widely used leading indicators of the UK economy for predicting the cyclical pattern of commercial real estate performance. The analysis uses monthly capital value data for UK industrials, offices and retail from the Investment Property Databank (IPD). Prospective economic indicators are drawn from three sources namely, the series used by the US Conference Board to construct their UK leading indicator and the series deployed by two private organisations, Lombard Street Research and NTC Research, to predict UK economic activity. We first identify turning points in the capital value series adopting techniques employed in the classical business cycle literature. We then estimate probit models using the leading economic indicators as independent variables and forecast the probability of different phases of capital values, that is, periods of declining and rising capital values. The forecast performance of the models is tested and found to be satisfactory. The predictability of lasting directional changes in property performance represents a useful tool for real estate investment decision-making.

Intelligent methods for load forecasting

Load forecasting is an important task in the management of a power utility. The most recent developments in forecasting involve the use of artificial intelligence techniques, which offer powerful modelling capabilities. This paper discusses these techniques and provides a review of their application to load forecasting.

A simplified pricing model for volatility futures

We develop a general model to price VIX futures contracts. The model is adapted to test both the constant elasticity of variance (CEV) and the Cox–Ingersoll–Ross formulations, with and without jumps. Empirical tests on VIX futures prices provide out-of-sample estimates within 2% of the actual futures price for almost all futures maturities. We show that although jumps are present in the data, the models with jumps do not typically outperform the others; in particular, we demonstrate the important benefits of the CEV feature in pricing futures contracts. We conclude by examining errors in the model relative to the VIX characteristics

Persistence of volatility in futures markets

This article examines the characteristics of key measures of volatility for different types of futures contracts to provide a better foundation for modeling volatility behavior and derivative values. Particular attention is focused on analyzing how different measures of volatility affect volatility persistence relationships. Intraday realized measures of volatility are found to be more persistent than daily measures, the type of GARCH procedure used for conditional volatility analysis is critical, and realized volatility persistence is not coherent with conditional volatility persistence. Specifically, although there is a good fit between the realized and conditional volatilities, no coherence exists between their degrees of persistence, a counterintuitive finding that shows realized and conditional volatility measures are not a substitute for one another

Modelling the implied volatility of options on long gilt futures

This paper investigates the properties of implied volatility series calculated from options on Treasury bond futures, traded on LIFFE. We demonstrate that the use of near-maturity at the money options to calculate implied volatilities causes less mis-pricing and is therefore superior to, a weighted average measure encompassing all relevant options. We demonstrate that, whilst a set of macroeconomic variables has some predictive power for implied volatilities, we are not able to earn excess returns by trading on the basis of these predictions once we allow for typical investor transactions costs.

The general observation period 2007 within the priority program on quantitative precipitation forecasting: concept and first results

In the year 2007 a General Observation Period (GOP) has been performed within the German Priority Program on Quantitative Precipitation Forecasting (PQP). By optimizing the use of existing instrumentation a large data set of in-situ and remote sensing instruments with special focus on water cycle variables was gathered over the full year cycle. The area of interest covered central Europe with increasing focus towards the Black Forest where the Convective and Orographically-induced Precipitation Study (COPS) took place from June to August 2007. Thus the GOP includes a variety of precipitation systems in order to relate the COPS results to a larger spatial scale. For a timely use of the data, forecasts of the numerical weather prediction models COSMO-EU and COSMO-DE of the German Meteorological Service were tailored to match the observations and perform model evaluation in a near real-time environment. The ultimate goal is to identify and distinguish between different kinds of model deficits and to improve process understanding.