Unifractality and multifractality in the Italian stock market

Tests for random walk behaviour in the Italian stock market are presented, based on an investigation of the fractal properties of the log return series for the Mibtel index. The random walk hypothesis is evaluated against alternatives accommodating either unifractality or multifractality. Critical values for the test statistics are generated using Monte Carlo simulations of random Gaussian innovations. Evidence is reported of multifractality, and the departure from random walk behaviour is statistically significant on standard criteria. The observed pattern is attributed primarily to fat tails in the return probability distribution, associated with volatility clustering in returns measured over various time scales. © 2009 Elsevier Inc. All rights reserved.

Estimating conditional volatility with neural networks

It is well known that one of the obstacles to effective forecasting of exchange rates is heteroscedasticity (non-stationary conditional variance). The autoregressive conditional heteroscedastic (ARCH) model and its variants have been used to estimate a time dependent variance for many financial time series. However, such models are essentially linear in form and we can ask whether a non-linear model for variance can improve results just as non-linear models (such as neural networks) for the mean have done. In this paper we consider two neural network models for variance estimation. Mixture Density Networks (Bishop 1994, Nix and Weigend 1994) combine a Multi-Layer Perceptron (MLP) and a mixture model to estimate the conditional data density. They are trained using a maximum likelihood approach. However, it is known that maximum likelihood estimates are biased and lead to a systematic under-estimate of variance. More recently, a Bayesian approach to parameter estimation has been developed (Bishop and Qazaz 1996) that shows promise in removing the maximum likelihood bias. However, up to now, this model has not been used for time series prediction. Here we compare these algorithms with two other models to provide benchmark results: a linear model (from the ARIMA family), and a conventional neural network trained with a sum-of-squares error function (which estimates the conditional mean of the time series with a constant variance noise model). This comparison is carried out on daily exchange rate data for five currencies.

Clustering of Pick bodies in the dentate gyrus in Pick's disease

In patients with Pick's disease (PD), high densities of tau positive Pick bodies (PB) have been observed within the granule cell layer of the dentate gyrus. This study investigated the spatial patterns of PB along the granule cell layer in coronal sections of the hippocampus in eight patients with PD. In all patients, there was evidence of clustering of PB within the granule cell layer; however, there was considerable variation in the pattern of clustering. In five patients, the clusters of PB were regularly distributed along the dentate gyms, and in two of these patients, the smaller clusters were aggregated into larger superclusters. In three patients, a single large cluster of PB, more than 1200 μm in diameter, was present. Clustering of PB may reflect a primary degenerative process within the granule cells or the degeneration of pathways that project to the dentate gyrus.

Volatility changes in drachma exchange rates

In January 2001 Greece joined the eurozone. The aim of this article is to examine whether an intention to join the eurozone had any impact on exchange rate volatility. We apply the Iterated Cumulative Sum of Squares (ICSS) algorithm of Inclan and Tiao (1994) to a set of Greek drachma exchange rate changes. We find evidence to suggest that the unconditional volatility of the drachma exchange rate against the dollar, British pound, yen, German mark and ECU/Euro was nonstationary, exhibiting a large number of volatility changes prior to European Monetary Union (EMU) membership. We then use a news archive service to identify the events that might have caused exchange rate volatility to shift. We find that devaluation of the drachma increased exchange rate volatility but ERM membership and a commitment to joining the eurozone led to lower volatility. Our findings therefore suggest that a strong commitment to join the eurozone may be sufficient to reduce some exchange rate volatility which has implications for countries intending to join the eurozone in the future.

Explaining volatility and serial correlation in opening and closing returns:a study of the FT-30 components

In this paper the performance of opening and closing returns, for the components of the FT-30 will be studied. It will be shown that for these stocks opening returns have higher volatility and a greater tendency towards negative serial correlation than closing returns. Unlike previous studies this contrasting performance cannot solely be attributed to differences in the trading mechanism across the trading day. All the stocks used in our sample trade thought the day using a uniform trading mechanism. In this paper, we suggest that it is differences in the speed that closing and opening returns adjust to new information that causes differences in return performance. By estimating the Amihud and Mendelson (1987) [Amihud, Yakov, & Mendelson, Haim (1987). Trading mechanisms and stock returns: An empirical investigation, Journal of Finance, 62 533-553.] partial adjustment model with noise, we show that opening returns have a tendency towards over-reaction, while closing returns have a tendency towards under-reaction. We suggest that it is these differences that cause a substantial proportion (although not all) of the asymmetric return patterns associated with opening and closing returns. © 2005 Elsevier Inc. All rights reserved.

Volatility changes caused by the trading system:a Markov switching application

An expanding literature exists to suggest that the trading mechanism can influence the volatility of security returns. This study adds to this literature by examining the impact that the introduction of SETS, on the London Stock Exchange, had on the volatility of security returns. Using a Markov switching regime change model security volatility is categorized as being in a regime of either high or low volatility. It is shown that prior to the introduction of SETS securities tended to be in a low volatility regime. At the time SETS was introduced securities moved to a high volatility regime. This suggests that volatility increased when SETS was introduced.

Stochastic volatility and the goodness-of-fit of the Heston model

Recently, Drǎgulescu and Yakovenko proposed an analytical formula for computing the probability density function of stock log returns, based on the Heston model, which they tested empirically. Their research design inadvertently favourably biased the fit of the data to the Heston model, thus overstating their empirical results. Furthermore, Drǎgulescu and Yakovenko did not perform any goodness-of-fit statistical tests. This study employs a research design that facilitates statistical tests of the goodness-of-fit of the Heston model to empirical returns. Robustness checks are also performed. In brief, the Heston model outperformed the Gaussian model only at high frequencies and even so does not provide a statistically acceptable fit to the data. The Gaussian model performed (marginally) better at medium and low frequencies, at which points the extra parameters of the Heston model have adverse impacts on the test statistics. © 2005 Taylor & Francis Group Ltd.

Volatility transmission between stock and bond markets

A two-factor no-arbitrage model is used to provide a theoretical link between stock and bond market volatility. While this model suggests that short-term interest rate volatility may, at least in part, drive both stock and bond market volatility, the empirical evidence suggests that past bond market volatility affects both markets and feeds back into short-term yield volatility. The empirical modelling goes on to examine the (time-varying) correlation structure between volatility in the stock and bond markets and finds that the sign of this correlation has reversed over the last 20 years. This has important implications far portfolio selection in financial markets. © 2005 Elsevier B.V. All rights reserved.

Clustering and spatial correlations of the neuronal cytoplasmic inclusions, astrocytic plaques and ballooned neurons in corticobasal degeneration

This study tested three hypotheses: (1) that there is clustering of the neuronal cytoplasmic inclusions (NCI), astrocytic plaques (AP) and ballooned neurons (BN) in corticobasal degeneration (CBD), (2) that the clusters of NCI and BN are not spatially correlated, and (3) that the lesions are correlated with disease ‘stage’. In 50% of the regions, clusters of lesions were 400–800 µm in diameter and regularly distributed parallel to the tissue boundary. Clusters of NCI and BN were larger in laminae II/III and V/VI, respectively. In a third of regions, the clusters of BN and NCI were negatively spatially correlated. Cluster size of the BN in the parahippocampal gyrus (PHG) was positively correlated with disease ‘stage’. The data suggest the following: (1) degeneration of the cortico-cortical pathways in CBD, (2) clusters of NCI and BN may affect different anatomical pathways and (3) BN may develop after the NCI in the PHG.

Clustering and periodicity of neurofibrillary tangles in the upper and lower cortical laminae in Alzheimer's disease

In Alzheimer's disease (AD), neurofibrillary tangles (NFT) occur within neurons in both the upper and lower cortical laminae. Using a statistical method that estimates the size and spacing of NFT clusters along the cortex parallel to the pia mater, two hypotheses were tested: 1) that the cluster size and distribution of the NFT in gyri of the temporal lobe reflect degeneration of the feedforward (FF) and feedback (FB) cortico-cortical pathways, and 2) that there is a spatial relationship between the clusters of NFT in the upper and lower laminae. In 16 temporal lobe gyri from 10 cases of sporadic AD, NFT were present in both the upper and lower laminae in 11/16 (69%) gyri and in either the upper or lower laminae in 5/16 (31%) gyri. Clustering of the NFT was observed in all gyri. A significant peak-to-peak distance was observed in the upper laminae in 13/15 (87%) gyri and in the lower laminae in 8/ 12 (67%) gyri, suggesting a regularly repeating pattern of NFT clusters along the cortex. The regularly distributed clusters of NFT were between 500 and 800 μm in size, the estimated size of the cells of origin of the FF and FB cortico-cortical projections, in the upper laminae of 6/13 (46%) gyri and in the lower laminae of 2/8 (25%) gyri. Clusters of NFT in the upper laminae were spatially correlated (in phase) with those in the lower laminae in 5/16 (31%) gyri. The clustering patterns of the NFT are consistent with their formation in relation to the FF and FB cortico-cortical pathways. In most gyri, NFT clusters appeared to develop independently in the upper and lower laminae.

Clustering of neuronal inclusions in "dementia with neurofilament inclusions"

Dementia with neurofilament inclusions (DNI) is a new disorder characterized clinically by early-onset dementia and histologically by the presence of intraneural inclusions immunopositive for neurofilament antigens but lacking tau and α-synuclein reactivity. We studied the clustering patterns of the neurofilament inclusions (NI) in regions of the temporal lobe in three cases of DNI to determine whether they have the same spatial patterns as inclusions in the tauopathies and α-synucleinopathies. The NI exhibited a clustered distribution (mean size of clusters 400 μm, range 50-800 μm, SD 687.8) in 24/28 of the areas studied. In 22 of these areas, the clusters exhibited a regular distribution along the tissue parallel to the pia mater or alveus. In 3 cortical areas, there was evidence of a more complex pattern in which the NI clusters were aggregated into larger superclusters. In 6 cortical areas, the size of the clusters approximated to those of the cells of origin of the cortico-cortical pathways but in the remaining areas cluster size was smaller than 400 μm. Despite the unique molecular profile of the NI, their spatial patterns are similar to those shown by filamentous neuronal inclusions in the tauopathies and α-synucleinopathies.

Correlations between the clustering patterns of the pathological changes in sporadic Creutzfeldt-Jakob disease

Correlations between the clustering patterns of the vacuolation ('spongiform change'), prion protein (PrP) deposits, and surviving neurons were studied in the cerebral cortex, hippocampus, and cerebellum in 11 cases of sporadic Creutzfeldt-Jakob disease (sCJD). Differences in the sizes of the clusters of vacuoles were observed between brain regions and in the cerebral cortex, between the upper and lower laminae. With the exception of the parietal cortex, mean cluster size of the vacuoles was similar to that of the PrP deposits in each brain area. Clusters of the vacuoles were spatially correlated with the density of surviving neurons and with the clusters of PrP deposits in 47% and 53% of cortical areas analysed respectively but there were few spatial correlation between the PrP deposits and the density of surviving neurons. The data suggest that the pathology of sCJD may spread through the brain via specific anatomical pathways. Development of the clusters of vacuoles is spatially related to surviving neurons while the appearance of clusters of PrP deposits is related to the development of the vacuolation.

Interdependence of international equity market volatility

This paper investigates whether equity market volatility in one major market is related to volatility elsewhere. This paper models the daily conditional volatility of equity market wide returns as a GARCH-(1,1) process. Such a model will capture the changing nature of the conditional variance through time. It is found that the correlation between the conditional variances of major equity markets has increased substantially over the last two decades. This supports work which has been undertaken on conditional mean returns which indicates there has been an increase in equity market integration.

Conditional volatility and firm size:an empirical analysis of UK equity portfolios

The techniques and insights from two distinct areas of financial economic modelling are combined to provide evidence of the influence of firm size on the volatility of stock portfolio returns. Portfolio returns are characterized by positive serial correlation induced by the varying levels of non-synchronous trading among the component stocks. This serial correlation is greatest for portfolios of small firms. The conditional volatility of stock returns has been shown to be well represented by the GARCH family of statistical processes. Using a GARCH model of the variance of capitalization-based portfolio returns, conditioned on the autocorrelation structure in the conditional mean, striking differences related to firm size are uncovered.