Evaluating interval forecasts of high-frequency financial data

A number of methods of evaluating the validity of interval forecasts of financial data are analysed, and illustrated using intraday FTSE100 index futures returns. Some existing interval forecast evaluation techniques, such as the Markov chain approach of Christoffersen (1998), are shown to be inappropriate in the presence of periodic heteroscedasticity. Instead, we consider a regression-based test, and a modified version of Christoffersen's Markov chain test for independence, and analyse their properties when the financial time series exhibit periodic volatility. These approaches lead to different conclusions when interval forecasts of FTSE100 index futures returns generated by various GARCH(1,1) and periodic GARCH(1,1) models are evaluated.

A word of caution on calculating market-based minimum capital risk requirements

This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. We show that this inaccuracy stems from the fact that GARCH models typically overstate the degree of persistence in return volatility. A simple modification to the model is found to improve the accuracy of MCRR estimates in both back- and out-of-sample tests. Given that internal risk management models are currently in widespread usage in some parts of the world (most notably the USA), and will soon be permitted for EC banks and investment firms, we believe that our paper should serve as a valuable caution to risk management practitioners who are using, or intend to use this popular class of models.

A Double-threshold GARCH Model for the French Franc/Deutschmark exchange rate

This paper combines and generalizes a number of recent time series models of daily exchange rate series by using a SETAR model which also allows the variance equation of a GARCH specification for the error terms to be drawn from more than one regime. An application of the model to the French Franc/Deutschmark exchange rate demonstrates that out-of-sample forecasts for the exchange rate volatility are also improved when the restriction that the data it is drawn from a single regime is removed. This result highlights the importance of considering both types of regime shift (i.e. thresholds in variance as well as in mean) when analysing financial time series.

Can portmanteau nonlinearity tests serve as general mis-specification tests?

A number of recent papers have employed the BDS test as a general test for mis-specification for linear and nonlinear models. We show that for a particular class of conditionally heteroscedastic models, the BDS test is unable to detect a common mis-specification. Our results also demonstrate that specific rather than portmanteau diagnostics are required to detect neglected asymmetry in volatility. However for both classes of tests reasonable power is only obtained using very large sample sizes.

Do long-short speculators destabilize commodity futures markets?

This paper contributes to the debate on the effects of the financialization of commodity futures markets by studying the conditional volatility of long–short commodity portfolios and their conditional correlations with traditional assets (stocks and bonds). Using several groups of trading strategies that hedge fund managers are known to implement, we show that long–short speculators do not cause changes in the volatilities of the portfolios they hold or changes in the conditional correlations between these portfolios and traditional assets. Thus calls for increased regulation of commodity money managers are, at this stage, premature. Additionally, long–short speculators can take comfort in knowing that their trades do not alter the risk and diversification properties of their portfolios.

Measuring European property investment performance: comparing different approaches

Purpose – Price indices for commercial real estate markets are difficult to construct because assets are heterogeneous, they are spatially dispersed and they are infrequently traded. Appraisal-based indices are one response to these problems, but may understate volatility or fail to capture turning points in a timely manner. This paper estimates “transaction linked indices” for major European markets to see whether these offer a different perspective on market performance. The paper aims to discuss these issues. Design/methodology/approach – The assessed value method is used to construct the indices. This has been recently applied to commercial real estate datasets in the USA and UK. The underlying data comprise appraisals and sale prices for assets monitored by Investment Property Databank (IPD). The indices are compared to appraisal-based series for the countries concerned for Q4 2001 to Q4 2012. Findings – Transaction linked indices show stronger growth and sharper declines over the course of the cycle, but they do not notably lead their appraisal-based counterparts. They are typically two to four times more volatile. Research limitations/implications – Only country-level indicators can be constructed in many cases owing to low trading volumes in the period studied, and this same issue prevented sample selection bias from being analysed in depth. Originality/value – Discussion of the utility of transaction-based price indicators is extended to European commercial real estate markets. The indicators offer alternative estimates of real estate market volatility that may be useful in asset allocation and risk modelling, including in a regulatory context.

Agricultural commodity markets : reference point for the real value of a currency

Using monthly time-series data 1999-2013, the paper shows that markets for agricultural commodities provide a yardstick for real purchasing power, and thus a reference point for the real value of fiat currencies. The daily need for each adult to consume about 2800 food calories is universal; data from FAO food balance sheets confirm that the world basket of food consumed daily is non-volatile in comparison to the volatility of currency exchange rates, and so the replacement cost of food consumed provides a consistent indicator of economic value. Food commodities are storable for short periods, but ultimately perishable, and this exerts continual pressure for markets to clear in the short term; moreover, food calories can be obtained from a very large range of foodstuffs, and so most households are able to use arbitrage to select a near optimal weighting of quantities purchased. The paper proposes an original method to enable a standard of value to be established, definable in physical units on the basis of actual worldwide consumption of food goods, with an illustration of the method.

Visceral behaviours and leadership: a dark side of boardroom life?

Purpose – Characteristics of leaders whose behaviour is visceral include taking action based on instinct rather than intellect and exhibiting coarse, base and often negative emotions. Despite the challenge of precisely defining the nature of visceral behaviour, the purpose of this paper is to provide insight into this less attractive side of boardroom life. Design/methodology/approach – Following a literature review of the research into the negative behaviour leaders exhibit, the paper highlights four forms of visceral behaviour based on focused and intimate qualitative case studies involving the experiences of those on the receiving end of that behaviour within a boardroom context. Findings – Based on interviews with an international sample of five chief executive officers (CEOs), plus three subordinates with substantial profit and loss responsibility, the study reveals a distinctly human experience from which no one is exempt. The idiosyncratic nature of the visceral behaviour experienced resulted in each study participant's unique experience. The authors conclude that leaders need to adopt specific measures in order to control and reduce the darker human tendencies. Research limitations/implications – The experiences of study participants are presented in four case studies, providing insight into their experiences whilst also protecting their identity. The study participants were drawn from a sample of companies operating globally within a single sector of the manufacturing industry. The concepts the authors present require validating in other organisations with different demographic profiles. Originality/value – The paper presents a model based on two dimensions – choice and level of mastery – that provides the reader with insight into the forms of visceral behaviour to which leaders succumb. Insight enables us to offer managers strategic suggestions to guard against visceral behaviour and assist them in mitigating its worst aspects, in both those with whom they work and themselves.

Bacterial motility confers fitness advantage in the presence of phages

Dispersal provides the opportunity to escape harm and colonize new patches, enabling populations to expand and persist. However, the benefits of dispersal associated with escaping harm will be dependent on the structure of the environment and the likelihood of escape. Here, we empirically investigate how the spatial distribution of a parasite influences the evolution of host dispersal. Bacteriophages are a strong and common threat for bacteria in natural environments and offer a good system with which to explore parasite-mediated selection on host dispersal. We used two transposon mutants of the opportunistic bacteria, Pseudomonas aeruginosa, which varied in their motility (a disperser and a nondisperser), and the lytic bacteriophage ФKZ. The phage was distributed either in the central point of colony inoculation only, thus offering an escape route for the dispersing bacteria; or, present throughout the agar, where benefits of dispersal might be lost. Surprisingly, we found dispersal to be equally advantageous under both phage conditions relative to when phages were absent. A general explanation is that dispersal decreased the spatial structuring of host population, reducing opportunities for parasite transmission, but other more idiosyncratic mechanisms may also have contributed. This study highlights the crucial role the parasites can play on the evolution of dispersal and, more specifically, that bacteriophages, which are ubiquitous, are likely to select for bacterial motility.

Evaluating the potential of high pressure high temperature and thermal processing on volatile compounds, nutritional and structural properties of orange and yellow carrots

The present study compares the impact of thermal and high pressure high temperature(HPHT) processing on volatile profile (via a non-targeted headspace fingerprinting) and structural and nutritional quality parameter (via targeted approaches) of orange and yellow carrot purees. The effect of oil enrichment was also considered. Since oil enrichment affects compounds volatility, the effect of oil was not studied when comparing the volatile fraction. For the targeted part, as yellow carrot purees were shown to contain a very low amount of carotenoids, focus was given to orange carrot purees. The results of the non-targeted approach demonstrated HPHT processing exerts a distinct effect on the volatile fractions compared to thermal processing. In addition, different colored carrot varieties are characterized by distinct headspace fingerprints. From a structural point of view, limited or no difference could be observed between orange carrot purees treated with HPHT or HT processes, both for samples without and with oil. From nutritional point of view, only in samples with oil, significant isomerisation of all-trans-β-carotene occurred due to both processing. Overall, for this type of product and for the selected conditions, HPHT processing seems to have a different impact on the volatile profile but rather similar impact on the structural and nutritional attributes compared to thermal processing.

The impact of monsoon intraseasonal variability on renewable power generation in India

India is increasingly investing in renewable technology to meet rising energy demands, with hydropower and other renewables comprising one-third of current installed capacity. Installed wind-power is projected to increase 5-fold by 2035 (to nearly 100GW) under the International Energy Agency’s New Policies scenario. However, renewable electricity generation is dependent upon the prevailing meteorology, which is strongly influenced by monsoon variability. Prosperity and widespread electrification are increasing the demand for air conditioning, especially during the warm summer. This study uses multi-decadal observations and meteorological reanalysis data to assess the impact of intraseasonal monsoon variability on the balance of electricity supply from wind-power and temperature-related demand in India. Active monsoon phases are characterised by vigorous convection and heavy rainfall over central India. This results in lower temperatures giving lower cooling energy demand, while strong westerly winds yield high wind-power output. In contrast, monsoon breaks are characterised by suppressed precipitation, with higher temperatures and hence greater demand for cooling, and lower wind-power output across much of India. The opposing relationship between wind-power supply and cooling demand during active phases (low demand, high supply) and breaks (high demand, low supply) suggests that monsoon variability will tend to exacerbate fluctuations in the so-called demand-net-wind (i.e., electrical demand that must be supplied from non-wind sources). This study may have important implications for the design of power systems and for investment decisions in conventional schedulable generation facilities (such as coal and gas) that are used to maintain the supply/demand balance. In particular, if it is assumed (as is common) that the generated wind-power operates as a price-taker (i.e., wind farm operators always wish to sell their power, irrespective of price) then investors in conventional facilities will face additional weather-volatility through the monsoonal impact on the length and frequency of production periods (i.e. their load-duration curves).

What drives ICT clustering in European Cities?

ICT clusters have attracted much attention because of their rapid growth and their value for other economic activities. Using a nested multi-level model, we examine how conditions at the country level and at the city level affect ICT clustering activity in 227 cities across 22 European countries. We test for the influence of three country regulations (starting a business, registering property, enforcing contracts) and two city conditions (proximity to university, network density) on ICT clustering. We consider heterogeneity within the sector and study two types of ICT activities: ICT product firms and ICT content firms. Our results indicate that country conditions and city conditions each have idiosyncratic implications for ICT clustering, and further, that these can vary by activities in ICT products or ICT content manufacturing.

Spanish as a World Language: The Interplay of Globalized Localization and Localized Globalization.

This article argues that two movements in constant interplay operate within the historical trajectory of the Spanish language: the localization that becomes globalized and the globalization that becomes localized. Equally, this article illustrates how, at the same time that Spanish is expanding in the world, new idiosyncratic and localized forms of the language are emerging. This article deals with the issues of standardization and language ideology, language contact, and redefinition of identities. The article focuses on three geographic loci: Spain, where Spanish opposes Catalan, Basque, and Galician; the United States, where migrants' Spanish dialects converge and confront English and each other; and finally, Latin America, where Spanish is in contact with Portuguese, indigenous, and Afro-Hispanic languages. The concepts that structure the discussion explain both language expansion and contraction as well as the conflict and constant negotiation between a language's standardized forms and its regional and social varieties.

The blended approach to real estate allocations: performance implications of combining an exposure to German Spezialfonds with Global Listed Real Estate Securities

This paper seeks to increase the understanding of the performance implications for investors who choose to combine an unlisted real estate portfolio (in this case German Spezialfonds) with a (global) listed real estate element. We call this a “blended” approach to real estate allocations. For the avoidance of doubt, in this paper we are dealing purely with real estate equity (listed and unlisted) allocations, and do not incorporate real estate debt (listed or unlisted) or direct property into the process. A previous paper (Moss and Farrelly 2014) showed the benefits of the blended approach as it applied to UK Defined Contribution Pension Schemes. The catalyst for this paper has been the recent attention focused on German pension fund allocations, which have a relatively low (real estate) equity content, and a high bond content. We have used the MSCI Spezialfonds Index as a proxy for domestic German institutional real estate allocations, and the EPRA Global Developed Index as a proxy for a global listed real estate allocation. We also examine whether a rules based trading strategy, in this case Trend Following, can improve the risk adjusted returns above those of a simple buy and hold strategy for our sample period 2004-2015. Our findings are that by blending a 30% global listed portfolio with a 70% allocation (as opposed to a typical 100% weighting) to Spezialfonds, the real estate allocation returns increase from 2.88% p.a. to 5.42% pa. Volatility increases, but only to 6.53%., but there is a noticeable impact on maximum drawdown which increases to 19.4%. By using a Trend Following strategy raw returns are improved from 2.88% to 6.94% p.a. , The Sharpe Ratio increases from 1.05 to 1.49 and the Maximum Drawdown ratio is now only 1.83% compared to 19.4% using a buy and hold strategy . Finally, adding this (9%) real estate allocation to a mixed asset portfolio allocation typical for German pension funds there is an improvement in both the raw return (from 7.66% to 8.28%) and the Sharpe Ratio (from 0.91 to 0.98).

Numbers in motion

We explore the debates surrounding the constructive and discursive capabilities of accounting information focusing in particular on the reception volatility of numbers once they are produced and ‘exposed’ to various communities of minds. Drawing on Goffman’s (1974) frame analysis and Vollmer’s (2007) work on the three-dimensional character of numerical signs, we explore how numbers can go through gradual or instantaneous transformations, get caught up in public debates and become ‘agents’ or ‘captives’ in creating social order and in some cases social drama. In our analysis we also relate to the work of Durkheim (1993, 2002) on the sociology of morality to illustrate how numbers can become indicators of moral transgression. The study explores both historical and contemporary examples of controversies and recent accounting scandals to demonstrate how preparers (of financial information) can lose control over numbers which then acquire new meanings through social context and collective (re)framing. The main contribution of the study is to illustrate how the narratives attached to numbers are malleable and fluid across both time and space.