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.

Data visualization with simultaneous feature selection

Data visualization algorithms and feature selection techniques are both widely used in bioinformatics but as distinct analytical approaches. Until now there has been no method of measuring feature saliency while training a data visualization model. We derive a generative topographic mapping (GTM) based data visualization approach which estimates feature saliency simultaneously with the training of the visualization model. The approach not only provides a better projection by modeling irrelevant features with a separate noise model but also gives feature saliency values which help the user to assess the significance of each feature. We compare the quality of projection obtained using the new approach with the projections from traditional GTM and self-organizing maps (SOM) algorithms. The results obtained on a synthetic and a real-life chemoinformatics dataset demonstrate that the proposed approach successfully identifies feature significance and provides coherent (compact) projections. © 2006 IEEE.

Simultaneous chemical reaction and distillation of formaldehyde

The thesis is concerned with the development and testing of a mathematical model of a distillation process in which the components react chemically. The formaldehyde-methanol-water system was selected and only the reversible reactions between formaldehyde and water giving methylene glycol and between formaldehyde and methanol producing hemiformal were assumed to occur under the distillation conditions. Accordingly the system has been treated as a five component system. The vapour-liquid equilibrium calculations were performed by solving iteratively the thermodynamic relationships expressing the phase equilibria with the stoichiometric equations expressing the chemical equilibria. Using optimisation techniques, the Wilson single parameters and Henry's constants were calculated for binary systems containing formaldehyde which was assumed to be a supercritical component whilst Wilson binary parameters were calculated for the remaining binary systems. Thus the phase equilibria for the formaldehyde system could be calculated using these parameters and good accuracy was obtained when calculated values were compared with experimental values. The distillation process was modelled using the mass and energy balance equations together with the phase equilibria calculations. The plate efficiencies were obtained from a modified A.I.Ch.E. Bubble Tray method. The resulting equations were solved by an iterative plate to plate calculation based on the Newton Raphson method. Experiments were carried out in a 76mm I.D., eight sieve plate distillation column and the results were compared with the mathematical model calculations. Overall, good agreement was obtained but some discrepancies were observed in the concentration profiles and these may have been caused by the effect of limited physical property data and a limited understanding of the reactions mechanism. The model equations were solved in the form of modular computer programs. Although they were written to describe the steady state distillation with simultaneous chemical reaction of the formaldehyde system, the approach used may be of wider application.

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.

Relating two simultaneous events in discourse: the role of on-goingness devices in L1 Tunisian Arabic, L1 French and L2 French by Tunisian learners

Our PhD study focuses on the role of aspectual marking in expressing simultaneity of events in Tunisian Arabic as a first language, French as a first language, as well as in French as a second language by Tunisian learners at different acquisitional stages. We examine how the explicit markers of on-goingness qa:’id and «en train de» in Tunisian Arabic and in French respectively are used to express this temporal relation, in competition with the simple forms, the prefixed verb form in Tunisian Arabic and the présent de l’indicatif in French. We use a complex verbal task of retelling simultaneous events sharing an interval on the time axis based on eight videos presenting two situations happening in parallel. Two types of simultaneity are exploited: perfect simultaneity (when the two situations are parallel to each other) and inclusion (one situation is framed by the second one). Our informants in French and in Tunisian Arabic have two profiles, highly educated and low educated speakers. We show that the participants’ response to the retelling task varies according to their profiles, and so does their use of the on-goingness devices in the expression of simultaneity. The differences observed between the two profile groups are explained by the degree to which the speakers have developed a habit of responding to tasks. This is a skill typically acquired during schooling. We notice overall that the use of qa:’id as well as of «en train de» is less frequent in the data than the use of the simple forms. However, qa:’id as well as «en train de» are employed to play discursive roles that go beyond the proposition level. We postulate that despite the shared features between Tunisian Arabic and French regarding marking the concept of on-goingness, namely the presence of explicit lexical, not fully grammaticalised markers competing with other non-marked forms, the way they are used in the discourse of simultaneous events shows clear differences. We explain that «en train de» plays a more contrastive role than qa:’id and its use in discourse obeys a stricter rule. In cases of the inclusion type of simultaneity, it is used to construe the ‘framing’ event that encloses the second event. In construing perfectly simultaneneous events, and when both «en train de» and présent de l’indicatif are used, the proposition with «en train de» generally precedes the proposition with présent de l’indicatif, and not the other way around. qa:id obeys, but to a less strict rule as it can be used interchangeably with the simple form regardless of the order of propositions. The contrastive analysis of French L1 and L2 reveals learners’ deviations from natives’ use of on-goingness devices. They generalise the use of «en train de» and apply different rules to the interaction of the different marked and unmarked forms in discourse. Learners do not master its role in discourse even at advanced stages of acquisition despite its possible emergence around the basic and intermediate varieties. We conclude that the native speakers’ use of «en train de» involves mastering its role at the macro-structure level. This feature, not explicitly available to learners in the input, might persistently present a challenge to L2 acquisition of the periphrasis.

Contrast discrimination with simultaneous monocular and dichoptic masks

In experiments reported elsewhere at this conference, we have revealed two striking results concerning binocular interactions in a masking paradigm. First, at low mask contrasts, a dichoptic masking grating produces a small facilitatory effect on the detection of a similar test grating. Second, the psychometric slope for dichoptic masking starts high (Weibull ß~4) at detection threshold, becomes low (ß~1.2) in the facilitatory region, and then unusually steep at high mask contrasts (ß~5.5). Neither of these results is consistent with Legge's (1984 Vision Research 24 385 - 394) model of binocular summation, but they are predicted by a two-stage gain control model in which interocular suppression precedes binocular summation. Here, we pose a further challenge for this model by using a 'twin-mask' paradigm (cf Foley, 1994 Journal of the Optical Society of America A 11 1710 - 1719). In 2AFC experiments, observers detected a patch of grating (1 cycle deg-1, 200 ms) presented to one eye in the presence of a pedestal in the same eye and a spatially identical mask in the other eye. The pedestal and mask contrasts varied independently, producing a two-dimensional masking space in which the orthogonal axes (10X10 contrasts) represent conventional dichoptic and monocular masking. The resulting surface (100 thresholds) confirmed and extended the observations above, and fixed the six parameters in the model, which fitted the data well. With no adjustment of parameters, the model described performance in a further experiment where mask and test were presented to both eyes. Moreover, in both model and data, binocular summation was greater than a factor of v2 at detection threshold. We conclude that this two-stage nonlinear model, with interocular suppression, gives a good account of early binocular processes in the perception of contrast. [Supported by EPSRC Grant Reference: GR/S74515/01]

Simultaneous dibit recovery of a DQPSK signal using a single Mach-Zehnder Interferometer

The dibit recovery of a DQPSK signal will be demonstrated using a single Mach Zehnder Interferometer, containing a 1-bit delay, and a single balanced receiver. The electrical output levels of the balanced receiver are dependent upon the relative phase delay between the arms of the Mach Zehnder Interferometer. This paper will investigate this characteristic when the input signal is DQPSK modulated. It will also be shown that with a certain amount of phase shift the DQPSK signal can be converted into four different equally spaced electrical signal levels. With each decoded level representing one of the four possible dibits.

Single uniform FBG for simultaneous measurement of liquid level and temperature

In this paper, we propose and demonstrate a novel scheme for simultaneous measurement of liquid level and temperature based on a simple uniform fiber Bragg grating (FBG) by monitoring both the short-wavelength-loss peaks and its Bragg resonance. The liquid level can be measured from the amplitude changes of the short-wavelength-loss peaks, while temperature can be measured from the wavelength shift of the Bragg resonance. Both theoretical simulation results and experimental results are presented. Such a scheme has some advantages including robustness, simplicity, flexibility in choosing sensitivity and simultaneous temperature measurement capability.

Grouping and the pitch of a mistuned fundamental component:effects of applying simultaneous multiple mistunings to the other harmonics

Mistuning a harmonic produces an exaggerated change in its pitch. This occurs because the component becomes inconsistent with the regular pattern that causes the other harmonics (constituting the spectral frame) to integrate perceptually. These pitch shifts were measured when the fundamental (F0) component of a complex tone (nominal F0 frequency = 200 Hz) was mistuned by +8% and -8%. The pitch-shift gradient was defined as the difference between these values and its magnitude was used as a measure of frame integration. An independent and random perturbation (spectral jitter) was applied simultaneously to most or all of the frame components. The gradient magnitude declined gradually as the degree of jitter increased from 0% to ±40% of F0. The component adjacent to the mistuned target made the largest contribution to the gradient, but more distant components also contributed. The stimuli were passed through an auditory model, and the exponential height of the F0-period peak in the averaged summary autocorrelation function correlated well with the gradient magnitude. The fit improved when the weighting on more distant channels was attenuated by a factor of three per octave. The results are consistent with a grouping mechanism that computes a weighted average of periodicity strength across several components. © 2006 Elsevier B.V. All rights reserved.

Simultaneous demultiplexing, data regeneration, and clock recovery with a single semiconductor optical amplifier-based nonlinear-optical loop mirror

We demonstrate simultaneous demultiplexing, data regeneration and clock recovery at 10Gbits/s, using a single semiconductor optical amplifier–based nonlinear-optical loop mirror in a phase-locked loop configuration.