Selecting volatility forecasting models for portfolio allocation purposes

Techniques for evaluating and selecting multivariate volatility forecasts are not yet understood as well as their univariate counterparts. This paper considers the ability of different loss functions to discriminate between a set of competing forecasting models which are subsequently applied in a portfolio allocation context. It is found that a likelihood-based loss function outperforms its competitors, including those based on the given portfolio application. This result indicates that considering the particular application of forecasts is not necessarily the most effective basis on which to select models.

Parameter estimation of structural commodity price models

Commodity price modeling is normally approached in terms of structural time-series models, in which the different components (states) have a financial interpretation. The parameters of these models can be estimated using maximum likelihood. This approach results in a non-linear parameter estimation problem and thus a key issue is how to obtain reliable initial estimates. In this paper, we focus on the initial parameter estimation problem for the Schwartz-Smith two-factor model commonly used in asset valuation. We propose the use of a two-step method. The first step considers a univariate model based only on the spot price and uses a transfer function model to obtain initial estimates of the fundamental parameters. The second step uses the estimates obtained in the first step to initialize a re-parameterized state-space-innovations based estimator, which includes information related to future prices. The second step refines the estimates obtained in the first step and also gives estimates of the remaining parameters in the model. This paper is part tutorial in nature and gives an introduction to aspects of commodity price modeling and the associated parameter estimation problem.

A securities market operator's use of the "please explain" price query and its impact on compliance

Market operators in New Zealand and Australia, such as the New Zealand Exchange (NZX) and the Australian Securities Exchange (ASX), have the regulatory power in their listing rules to issue queries to their market participants to explain unusual fluctuations in trading price and/or volume in the market. The operator will issue a price query where it believes that the market has not been fully informed as to price relevant information. Responsive regulation theory has informed much of the regulatory debate in securities laws in the region. Price queries map onto the lower level of the enforcement pyramid envisaged by responsive regulation and are one strategy that a market operator can use in communicating its compliance expectations to its stakeholders. The issue of a price query may be a precursor to more severe enforcement activities. The aim of this study is to investigate whether increased use of price queries by the securities market operator in New Zealand corresponded with an increase in disclosure frequency by all participating companies. The study finds that an increased use of price queries did correspond with an increase in disclosure frequency. A possible explanation for this finding is that price queries are an effective means of appealing to the factors that motivate corporations, and the individuals who control them, to comply with the law and regulatory requirements. This finding will have implications for both the NZX and the ASX as well as for regulators and policy makers generally.

Predicting stock market returns and volatility with investor sentiment : evidence from eight developed countries

We test the predictive ability of investor sentiment on the return and volatility at the aggregate market level in the U.S., four largest European countries and three Asia-Pacific countries. We find that in the U.S., France and Italy periods of high consumer confidence levels are followed by low market returns. In Japan both the level and the change in consumer confidence boost the market return in the next month. Further, shifts in sentiment significantly move conditional volatility in most of the countries, and in Italy such impacts lead to an increase in returns by 4.7% in the next month.

Does the price of oil interact with clean energy prices in the stock market?

In this paper, we analyze the relationships among oil prices, clean energy stock prices, and technology stock prices, endogenously controlling for structural changes in the market. To this end, we apply Markov-switching vector autoregressive models to the economic system consisting of oil prices, clean energy and technology stock prices, and interest rates. The results indicate that there was a structural change in late 2007, a period in which there was a significant increase in the price of oil. In contrast to the previous studies, we find a positive relationship between oil prices and clean energy prices after structural breaks. There also appears to be a similarity in terms of the market response to both clean energy stock prices and technology stock prices. © 2013 Elsevier B.V.

Effect of Oil Price on Emissions Trading Market: VAR Analysis

In this study, we investigated the relationship of European Union carbon dioxide CO2 allowances EUAs prices and oil prices by employing a VAR analysis, Granger causality test and impulse response function. If oil price continues increasing, companies will decrease dependency on fossil fuels because of an increase in energy costs. Therefore, the price of EUAs may be affected by variations in oil prices if the greenhouse gases discharged by the consumption of alternative energy are less than that of fossil fuels. There are no previous studies that investigated these relationships. In this study, we analyzed eight types of EUAs EUA05 to EUA12 with a time series daily data set during 2005-2007 collected from a European Climate Exchange time series data set. Differentiations in these eight types were redemption period. We used the New York Mercantile Exchange light sweet crude price as an oil price. From our examination, we found that only the EUA06 and EUA07 types of EUAs Granger-cause oil prices and vice versa and other six types of EUAs do not Granger-cause oil price. These results imply that the earlier redemption period types of EUAs are more sensitive to oil price. In employing the impulse response function, the results showed that a shock to oil price has a slightly positive effect on all types of EUAs for a very short period. On the other hand, we found that a shock to price of EUA has a slightly negative effect on oil price following a positive effect in only EUA06 and EUA07 types. Therefore, these results imply that fluctuations in EUAs prices and oil prices have little effect on each other. Lastly, we did not consider the substitute energy prices in this study, so we plan to include the prices of coal and natural gas in future analyses.

Tests on price linkage between the U.S. and Japanese gold and silver futures markets

We tested the price linkage, the law of one price (LOP) condition, and the causality of the price linkage between the U.S. and Japanese gold and silver futures markets with consideration of structural breaks in the price series. The LOP condition did not hold for both the gold and silver markets when structural breaks were not considered but it sustained in some periods when it was tested for the break periods. We found from the causality test that the price linkage between the U.S. and Japanese gold and silver futures markets were led by the U.S. market.

Price linkages in the copper futures, primary, and scrap markets

This study investigates how markets for different levels of copper purity are interrelated by testing the long-run price linkage and causalities among the copper futures, primary, copper scrap, and brass scrap markets. It is expected that copper markets that deal with high purity levels, such as the futures, primary, and copper scrap markets, have a long-run relationship. However, brass scrap markets where copper with a lower purity is traded may not have a price linkage with other copper markets. The results reveal that a long-run relationship holds between the futures, primary, and copper scrap markets but the brass scrap market does not have a long-run relationship with the other markets. From the short-run and long-run causality tests, we determine that the futures market plays an important role in transmitting price information to other copper markets while such information flow is not found for the brass scrap market.

The impacts of exchange rate volatility on vegetable trade flows

Trade flows of commodities are generally affected by the principles of comparative advantage in a free trade. However, trade flows might be enhanced or distorted not only by various government interventions, but also by exchange rate fluctuations among others. This study applies a commodity-specific gravity model to selected vegetable trade flows among Organization for Economic Co-operation and Development (OECD) countries to determine the effects of exchange rate uncertainty on the trade flows. Using the data from 1996 to 2002, the results show that, while the exchange rate uncertainty significantly reduces trade in the majority of commodity flows, there is evidence that both short- and long-term volatility have positive effect on trade flows of specific commodities. This study also tests the regional preferential trade agreements such as the North American Free Trade Agreement (NAFTA), the Asia-Pacific Economic Cooperation (APEC) and the EU, and their different effects on commodities.

Energy price-induced and exogenous technological change : Assessing the economic and environmental outcomes

In this paper, we distinguish between factor/output substitution and shifts in the production technology frontier. Our model includes the by-products of carbon dioxide and sulfur dioxide emissions where the function requires the simultaneous expansion of good outputs and reductions in emissions. We estimate a directional output distance function for 80 countries over the period 1971-2000 to measure the exogenous and oil price-induced technological change. On average, we find substantial oil price-induced technological progress at the world level when long-term oil prices are rising, although the growth rate is more volatile in developed countries than in developing countries. The results also show that developed countries experience higher exogenous technological progress in comparison with developing countries, and the gap between the two has increased during the period of our study.

Asymmetric price range effects on vertical extensions

Vertical line extensions, both step-up and step-down, are common occurrence in consumer products. For example, Timex recently launched its luxury high-end Valentino line. On the other hand, many companies use downscale extensions to increase the overall sales volume. For instance, a number of luxury watch brands recently introduced watch collections with lower price points, like TAG Heur’s affordable watch the Aquaracer Calibre 5. Previous literature on vertical extensions has investigated how number of products in the line (Dacin and Smith 1994), the direction of the extension, brand concept (Kim, Lavack, and Smith 2001), and perceived risk (Lei, de Ruyter, and Wetzels 2008) affect extensions’ evaluation. Common to this literature is the use of models based on adaptation-level theory, which states that all relevant price information is integrated into a single prototype value and used in consumer judgments of price (Helson 1947; Mazumdar, Raj, and Sinha 2005). In the current research we argue that, while adaptation-level theory can be viewed as a useful simplification to understanding consumers’ evaluations, it misses out important contextual influences caused by a brand’s price range. Drawing on research on range-frequency theory (Mellers and Cooke 1994; Parducci 1965) we investigate the effects of price point distance and parent brand’s price range on evaluations of vertical extensions. Our reasoning leads to two important predictions that we test in a series of three experiments...

Corporate credit risk prediction under stochastic volatility and jumps

This paper examines the impact of allowing for stochastic volatility and jumps (SVJ) in a structural model on corporate credit risk prediction. The results from a simulation study verify the better performance of the SVJ model compared with the commonly used Merton model, and three sources are provided to explain the superiority. The empirical analysis on two real samples further ascertains the importance of recognizing the stochastic volatility and jumps by showing that the SVJ model decreases bias in spread prediction from the Merton model, and better explains the time variation in actual CDS spreads. The improvements are found particularly apparent in small firms or when the market is turbulent such as the recent financial crisis.

Real-time price based home energy management scheduler

With the recent development of advanced metering infrastructure, real-time pricing (RTP) scheme is anticipated to be introduced in future retail electricity market. This paper proposes an algorithm for a home energy management scheduler (HEMS) to reduce the cost of energy consumption using RTP. The proposed algorithm works in three subsequent phases namely real-time monitoring (RTM), stochastic scheduling (STS) and real-time control (RTC). In RTM phase, characteristics of available controllable appliances are monitored in real-time and stored in HEMS. In STS phase, HEMS computes an optimal policy using stochastic dynamic programming (SDP) to select a set of appliances to be controlled with an objective of the total cost of energy consumption in a house. Finally, in RTC phase, HEMS initiates the control of the selected appliances. The proposed HEMS is unique as it intrinsically considers uncertainties in RTP and power consumption pattern of various appliances. In RTM phase, appliances are categorized according to their characteristics to ease the control process, thereby minimizing the number of control commands issued by HEMS. Simulation results validate the proposed method for HEMS.

kmth price sealed-bid auctions with general independent values and equilibrium linear mark-ups

A generalised bidding model is developed to calculate a bidder’s expected profit and auctioners expected revenue/payment for both a General Independent Value and Independent Private Value (IPV) kmth price sealed-bid auction (where the mth bidder wins at the kth bid payment) using a linear (affine) mark-up function. The Common Value (CV) assumption, and highbid and lowbid symmetric and asymmetric First Price Auctions and Second Price Auctions are included as special cases. The optimal n bidder symmetric analytical results are then provided for the uniform IPV and CV models in equilibrium. Final comments concern implications, the assumptions involved and prospects for further research.