Essays on Risk Modeling. Applications to Portfolio and Risk Management (summary section only)

In this thesis we deal with the concept of risk. The objective is to bring together and conclude on some normative information regarding quantitative portfolio management and risk assessment. The first essay concentrates on return dependency. We propose an algorithm for classifying markets into rising and falling. Given the algorithm, we derive a statistic: the Trend Switch Probability, for detection of long-term return dependency in the first moment. The empirical results suggest that the Trend Switch Probability is robust over various volatility specifications. The serial dependency in bear and bull markets behaves however differently. It is strongly positive in rising market whereas in bear markets it is closer to a random walk. Realized volatility, a technique for estimating volatility from high frequency data, is investigated in essays two and three. In the second essay we find, when measuring realized variance on a set of German stocks, that the second moment dependency structure is highly unstable and changes randomly. Results also suggest that volatility is non-stationary from time to time. In the third essay we examine the impact from market microstructure on the error between estimated realized volatility and the volatility of the underlying process. With simulation-based techniques we show that autocorrelation in returns leads to biased variance estimates and that lower sampling frequency and non-constant volatility increases the error variation between the estimated variance and the variance of the underlying process. From these essays we can conclude that volatility is not easily estimated, even from high frequency data. It is neither very well behaved in terms of stability nor dependency over time. Based on these observations, we would recommend the use of simple, transparent methods that are likely to be more robust over differing volatility regimes than models with a complex parameter universe. In analyzing long-term return dependency in the first moment we find that the Trend Switch Probability is a robust estimator. This is an interesting area for further research, with important implications for active asset allocation.

Owners' Way or the Highway: Short-term Expectations and Owner Impatience

Increased media exposure to layoffs and corporate quarterly financial reporting have created arguable a common perception – especially favored by the media itself – that the companies have been forced to improve their financial performance from quarter to quarter. Academically the relevant question is whether the companies themselves feel that they are exposed to short-term pressure to perform even if it means that they have to compromise company’s long-term future. This paper studies this issue using results from a survey conducted among the 500 largest companies in Finland. The results show that companies in general feel moderate short-term pressure, with reasonable dispersion across firms. There seems to be a link between the degree of pressure felt, and the firm’s ownership structure, i.e. we find support for the existence of short-term versus long-term owners. We also find significant ownership related differences, in line with expectations, in how such short-term pressure is reflected in actual decision variables such as the investment criteria used.

Microsite occupancy and spatial structure of regeneration in three late-successional Norway spruce forests in northern Europe

A comparison of microsite occupancy and the spatial structure of regeneration in three areas of late-successional Norway spruce dominated forest. Pallas-Ylläs is understood to have been influenced only by small-scale disturbance; Dvina-Pinega has had sporadic larger-scale disturbances; Kazkim has been affected by fire. All spruce and birch trees with diameter at breast height (DBH) ?10 cm were mapped in five stands on 40 m x 400 m transects, and those with DBH < 10 cm on 2 or 4 m x 400 m subplots. Microsite type was inventoried at 1m intervals along the centre line and for each tree with DBH < 10 cm. At all study areas small seedlings (h < 0.3 m, DBH < 10 cm) preferentially occupied disturbed microsites. In contrast, spruce saplings (h ? 1.3 m, DBH <10 cm) at all study areas showed less, or no, preference. At Pallas-Ylläs spruce seedlings (h < 1.3 m, DBH < 10 cm) and saplings (h ? 1.3 m, DBH < 10 cm) exhibited spatial correlation at scales from 32-52 m. At Dvina-Pinega saplings of both spruce and birch exhibited spatial correlation at scales from 32-81 m. At Kazkim spatial correlation of seedlings and saplings of both species was exhibited over variable distances. No spatial cross-correlation was found between overstorey basal area (DBH ? 10 cm) and regeneration (h ? 1.3 m, DBH < 10 cm) at any study area. The results confirm the importance of disturbed microsites for seedling establishment, but suggest that undisturbed microsites may sometimes be more advantageous for long-term tree survival. The regeneration gap concept may not be useful in describing the regeneration dynamics of late-successional boreal forests.

Sedimentary zooplankton remains as indicators of lake ecological quality and trophic structure

To protect and restore lake ecosystems under threats posed by the increasing human population, information on their ecological quality is needed. Lake sediments provide a data rich archive that allows identification of various biological components present prior to anthropogenic alterations as well as a constant record of changes. By providing a longer dimension of time than any ongoing monitoring programme, palaeolimnological methods can help in understanding natural variability and long-term ecological changes in lakes. As zooplankton have a central role in the lake food web, their remains can potentially provide versatile information on past trophic structure. However, various taphonomic processes operating in the lakes still raise questions concerning how subfossil assemblages reflect living communities. This thesis work aimed at improving the use of sedimentary zooplankton remains in the reconstruction of past zooplankton communities and the trophic structure in lakes. To quantify interspecific differences in the accumulation of remains, the subfossils of nine pelagic zooplankton taxa in annually laminated sediments were compared with monitoring results for live zooplankton in Lake Vesijärvi. This lake has a known history of eutrophication and recovery, which resulted from reduced external loading and effective fishing of plankti-benthivorous fish. The response of zooplankton assemblages to these known changes was resolved using annually laminated sediments. The generality of the responses observed in Lake Vesijärvi were further tested with a set of 31 lakes in Southern Finland, relating subfossils in surface sediments to contemporary water quality and fish density, as well as to lake morphometry. The results demonstrated differential preservation and retention of cladoceran species in the sediment. Daphnia, Diaphanosoma and Ceriodaphnia were clearly underrepresented in the sediment samples in comparison to well-preserved Bosmina species, Chydorus, Limnosida and Leptodora. For well-preserved species, the annual net accumulation rate was similar to or above the expected values, reflecting effective sediment focusing and accumulation in the deepest part of the lake. The decreased fish density and improved water quality led to subtle changes in zooplankton community composition. The abundance of Diaphanosoma and Limnosida increased after the reduction in fish density, while Ceriodaphnia and rotifers decreased. The most sensitive indicator of fish density was the mean size of Daphnia ephippia and Bosmina (E.) crassicornis ephippia and carapaces. The concentration of plant-associated species increased, reflecting expanding littoral vegetation along with increasing transparency. Several of the patterns observed in Lake Vesijärvi could also be found within the set of 31 lakes. According to this thesis work, the most useful cladoceran-based indices for nutrient status and planktivorous fish density in Finnish lakes were the relative abundances of certain pelagic taxa, and the mean size of Bosmina spp. carapaces, especially those of Bosmina (E.) cf. coregoni. The abundance of plant-associated species reflected the potential area for aquatic plants. Lake morphometry and sediment organic content, however, explained a relatively high proportion of the variance in the species data, and more studies are needed to quantify lake-specific differences in the accumulation and preservation of remains. Commonly occurring multicollinearity between environmental variables obstructs the cladoceran-based reconstruction of single environmental variables. As taphonomic factors and several direct and indirect structuring forces in lake ecosystems simultaneously affect zooplankton, the subfossil assemblages should be studied in a holistic way before making final conclusions about the trophic structure and the change in lake ecological quality.

Discovery of novel glitazones incorporated with phenylalanine and tyrosine: Synthesis, antidiabetic activity and structure-activity relationships

We report a series of new glitazones incorporated with phenylalanine and tyrosine. All the compounds were tested for their in vitro glucose uptake activity using rat-hemidiaphragm, both in presence and absence of insulin. Six of the most active compounds from the in vitro screening were taken forward for their in vivo triglyceride and glucose lowering activity against dexamethazone induced hyperlipidemia and insulin resistance in Wistar rats. The liver samples of rats that received the most active compounds, 23 and 24, in the in vivo studies, were subjected to histopathological examination to assess their short term hepatotoxicity. The investigations on the in vitro glucose uptake, in vivo triglyceride and glucose lowering activity are described here along with the quantitative structure-activity relationships. (C) 2012 Elsevier Inc. All rights reserved.

Long-term effects of Macroternies termites, herbivores and annual early fire on woody undergrowth community in Sudanian woodland, Burkina Faso

Termites, herbivores and fire are recognized as major guilds that structure woody plant communities in African savanna and woodland ecosystems. An understanding of their interaction is crucial to design appropriate management regimes. The aim of this study was to evaluate the long-term impacts of herbivore, fire and termite activities on regeneration of trees. Permanent experimental quadrats were established in 1992 in the Sudanian woodland of Burkina Faso subjected to grazing by livestock and annual early fire and the control. Within the treatment quadrats, an inventory of the woody undergrowth community was conducted on termitaria occupied by Macrotermes subhyalinus, extended termitosphere (within 5 m radius from the mound base) and adjacent area (beyond 5 m from the mound base). Hierarchical analysis was performed to determine significant differences in species richness, abundance and diversity indices among vegetation patches within fire and herbivory treatments. Grazed quadrats had significantly (P < 0.001) more species and stem density of woody undergrowth than non-grazed quadrats but maintained similar level of species richness and stem density of woody undergrowth on termitaria. There were not significant differences (P>0.05) in species richness and stem density between burnt and unburnt quadrats. Termitaria supported a highly diverse woody undergrowth with higher stem density than either the extended termitosphere or rest of quadrats. The density of woody undergrowth was significantly related with mature trees of selected species on termitaria (R-2 = 0.593; P<0.001) than that on the extended termitosphere (R-2 = 0.333; P<0.001) and adjacent area (R-2 = 0.197; P<0.001). It can be concluded that termites facilitate the regeneration of woody species while grazing and annual early fire play a minor role in the regeneration of woody species. The current policy that prohibits grazing should be revised to accommodate the interests of livestock herders. (C) 2014 Elsevier GmbH. All rights reserved.

Role of gas in supporting grand spiral structure

The density wave theory for the grand-design two-armed spiral pattern in galaxies is successful in explaining several observed features. However, the long-term persistence of this spiral structure is a serious problem since the group transport would destroy it within about a billion years as shown in a classic paper by Toomre. In this paper, we include the low-velocity dispersion component, namely gas, on an equal footing with stars in the formulation of the density wave theory, and obtain the dispersion relation for this coupled system. We show that the inclusion of gas makes the group transport slower by a factor of few, thus allowing the pattern to persist longer - for several billion years. Though still less than the Hubble time, this helps in making the spiral structure more long-lived. Further we show that addition of gas is essential to get a stable wave for the observed pattern speed for the Galaxy, which otherwise is not possible for a one-component stellar disc.

Vegetation structure and composition of tropical evergreen and deciduous forests in Uttara Kannada District, Western Ghats under different disturbance regimes

In the present paper, we present the structure and composition of tropical evergreen and deciduous forests in the Western Ghats monitored under a long-term programme involving Indian Institute of Science, Earthwatch and volunteer investigators from HSBC. Currently, there is limited evidence on the status and dynamics of tropical forests in the context of human disturbance and climate change. Observations made in this study show that the `more disturbed' evergreen and one of the deciduous plots have low species diversity compared to the less-disturbed forests. There are also variations in the size class structure in the more and `less disturbed' forests of all the locations. The variation is particularly noticeable in the DBH size class 10 - 15 cm category. When biomass stock estimates are considered, there was no significant difference between evergreen and deciduous forests. The difference in biomass stocks between `less disturbed' and `more disturbed' forests within a forest type is also low. Thus, the biomass and carbon stock has not been impacted despite the dependence of communities on the forests. Periodic and long-term monitoring of the status and dynamics of the forests is necessary in the context of potential increased human pressure and climate change. There is, therefore, a need to inform the communities of the impact of extraction and its effect on regeneration so as to motivate them to adopt what may be termed as ``adaptive resource management'', so as to sustain the flow of forest products.

Synthesis, and crystal and electronic structure of sodium metal phosphate for use as a hybrid capacitor in non-aqueous electrolyte

Energy storage devices based on sodium have been considered as an alternative to traditional lithium based systems because of the natural abundance, cost effectiveness and low environmental impact of sodium. Their synthesis, and crystal and electronic properties have been discussed, because of the importance of electronic conductivity in supercapacitors for high rate applications. The density of states of a mixed sodium transition metal phosphate (maricite, NaMn1/3Co1/3Ni1/3PO4) has been determined with the ab initio generalized gradient approximation (GGA)+Hubbard term (U) method. The computed results for the mixed maricite are compared with the band gap of the parent NaFePO4 and the electrochemical experimental results are in good agreement. A mixed sodium transition metal phosphate served as an active electrode material for a hybrid supercapacitor. The hybrid device (maricite versus carbon) in a nonaqueous electrolyte shows redox peaks in the cyclic voltammograms and asymmetric profiles in the charge-discharge curves while exhibiting a specific capacitance of 40 F g(-1) and these processes are found to be quasi-reversible. After long term cycling, the device exhibits excellent capacity retention (95%) and coulombic efficiency (92%). The presence of carbon and the nanocomposite morphology, identified through X-ray photoelectron spectroscopy (XPS) and transmission electron microscopy (TEM) studies, ensures the high rate capability while offering possibilities to develop new cathode materials for sodium hybrid devices.

Numerical and Analytical Study on the Pull-in Instability of Micro-Structure under Electrostatic Loading

The one-mode analysis method on the pull-in instability of micro-structure under electrostatic loading is presented. Taylor series are used to expand the electrostatic loading term in the one-mode analysis method, which makes analytical solution available. The one-mode analysis is the combination of Galerkin method and Cardan solution of cubic equation. The one-mode analysis offers a direct computation method on the pull-in voltage and displacement. In low axial loading range, it shows little difference with the established multi-mode analysis on predicting the pull-in voltages for three different structures (cantilever, clamped-clamped beams and the plate with four edges simply-supported) studied here. For numerical multi-mode analysis, we also show that using the structural symmetry to select the symmetric mode can greatly reduce both the computation effort and the numerical fluctuation.

Long Term Dynamics in CO2 Allowance Prices and Carbon Capture Investments

In this paper we analyse the behaviour of the EU market for CO2 emission allowances; specifically, we focus on the contracts maturing in the Kyoto Protocol's second period of application (2008 to 2012). We calibrate the underlying parameters for the allowance price in the long run and we also calibrate those from the Spanish wholesale electricity market. This information is then used to assess the option to install a carbon capture and storage (CCS) unit in a coal-fired power plant. We use a two-dimensional binomial lattice where costs and profits are valued and the optimal investment time is determined. In other words, we study the trigger allowance prices above which it is optimal to install the capture unit immediately. We further analyse the impact of several variables on the critical prices, among them allowance price volatility and a hypothetical government subsidy. We conclude that, at current permit prices, from a financial point of view, immediate installation does not seem justified. This need not be the case, though, if carbon market parameters change dramatically and/or a specific policy to promote these units is adopted.

Why Economists Reject Long-Term Fisheries Management Plans?

Most fisheries agencies conduct biological and economic assessments independently. This independent conduct may lead to situations in which economists reject management plans proposed by biologists. The objective of this study is to show how to find optimal strategies that may satisfy biologists and economists' conditions. In particular we characterize optimal fishing trajectories that maximize the present value of a discounted economic indicator taking into account the age-structure of the population as in stock assessment methodologies. This approach is applied to the Northern Stock of Hake. Our main empirical findings are: i) Optimal policy may be far away from any of the classical scenarios proposed by biologists, ii) The more the future is discounted, the higher the likelihood of finding contradictions among scenarios proposed by biologists and conclusions from economic analysis, iii) Optimal management reduces the risk of the stock falling under precautionary levels, especially if the future is not discounted to much, and iv) Optimal stationary fishing rate may be very different depending on the economic indicator used as reference.

Does the Term Spread play a role in the FED's reaction function? An Empirical Investigation

Using US data for the period 1967:5-2002:4, this paper empirically investigates the performance of a Fed’s reaction function (FRF) that (i) allows for the presence of switching regimes, (ii) considers the long-short term spread in addition to the typical variables, (iii) uses an alternative monthly indicator of general economic activity suggested by Stock and Watson (1999), and (iv) considers interest rate smoothing. The estimation results show the existence of three switching regimes, two characterized by low volatility and the remaining regime by high volatility. Moreover, the scale of the responses of the Federal funds rate to movements in the rate of inflation and the economic activity index depends on the regime. The estimation results also show robust empirical evidence that the importance of the term spread in the FRF has increased over the sample period and the FRF has been more stable during the term of office of Chairman Greenspan than in the pre-Greenspan period.

Autorregresive conditional volatility, skewness and kurtosis

This paper proposes a GARCH-type model allowing for time-varying volatility, skewness and kurtosis. The model is estimated assuming a Gram-Charlier series expansion of the normal density function for the error term, which is easier to estimate than the non-central t distribution proposed by Harvey and Siddique (1999). Moreover, this approach accounts for time-varying skewness and kurtosis while the approach by Harvey and Siddique (1999) only accounts for nonnormal skewness. We apply this method to daily returns of a variety of stock indices and exchange rates. Our results indicate a significant presence of conditional skewness and kurtosis. It is also found that specifications allowing for time-varying skewness and kurtosis outperform specifications with constant third and fourth moments.

The role of the term spread in an augmented Taylor rule: An empirical investigation

Using US data for the period 1967:5-2002:4, this paper empirically investigates the performance of an augmented version of the Taylor rule (ATR) that (i) allows for the presence of switching regimes, (ii) considers the long-short term spread in addition to the typical variables, (iii) uses an alternative monthly indicator of general economic activity suggested by Stock and Watson (1999), and (iv) considers interest rate smoothing. The estimation results show the existence of switching regimes, one characterized by low volatility and the other by high volatility. Moreover, the scale of the responses of the Federal funds rate to movements in the term spread, inflation and the economic activity index depend on the regime. The estimation results also show robust empirical evidence that the ATR has been more stable during the term of office of Chairman Greenspan than in the pre-Greenspan period. However, a closer look at the Greenspan period shows the existence of two alternative regimes and that the response of the Fed funds rate to inflation has not been significant during this period once the term spread is considered.