Essays in asset price bubbles

This thesis studies the field of asset price bubbles. It is comprised of three independent chapters. Each of these chapters either directly or indirectly analyse the existence or implications of asset price bubbles. The type of bubbles assumed in each of these chapters is consistent with rational expectations. Thus, the kind of price bubbles investigated here are known as rational bubbles in the literature. The following describes the three chapters. Chapter 1: This chapter attempts to explain the recent US housing price bubble by developing a heterogeneous agent endowment economy asset pricing model with risky housing, endogenous collateral and defaults. Investment in housing is subject to an idiosyncratic risk and some mortgages are defaulted in equilibrium. We analytically derive the leverage or the endogenous loan to value ratio. This variable comes from a limited participation constraint in a one period mortgage contract with monitoring costs. Our results show that low values of housing investment risk produces a credit easing effect encouraging excess leverage and generates credit driven rational price bubbles in the housing good. Conversely, high values of housing investment risk produces a credit crunch characterized by tight borrowing constraints, low leverage and low house prices. Furthermore, the leverage ratio was found to be procyclical and the rate of defaults countercyclical consistent with empirical evidence. Chapter 2: It is widely believed that financial assets have considerable persistence and are susceptible to bubbles. However, identification of this persistence and potential bubbles is not straightforward. This chapter tests for price bubbles in the United States housing market accounting for long memory and structural breaks. The intuition is that the presence of long memory negates price bubbles while the presence of breaks could artificially induce bubble behaviour. Hence, we use procedures namely semi-parametric Whittle and parametric ARFIMA procedures that are consistent for a variety of residual biases to estimate the value of the long memory parameter, d, of the log rent-price ratio. We find that the semi-parametric estimation procedures robust to non-normality and heteroskedasticity errors found far more bubble regions than parametric ones. A structural break was identified in the mean and trend of all the series which when accounted for removed bubble behaviour in a number of regions. Importantly, the United States housing market showed evidence for rational bubbles at both the aggregate and regional levels. In the third and final chapter, we attempt to answer the following question: To what extend should individuals participate in the stock market and hold risky assets over their lifecycle? We answer this question by employing a lifecycle consumption-portfolio choice model with housing, labour income and time varying predictable returns where the agents are constrained in the level of their borrowing. We first analytically characterize and then numerically solve for the optimal asset allocation on the risky asset comparing the return predictability case with that of IID returns. We successfully resolve the puzzles and find equity holding and participation rates close to the data. We also find that return predictability substantially alter both the level of risky portfolio allocation and the rate of stock market participation. High factor (dividend-price ratio) realization and high persistence of factor process indicative of stock market bubbles raise the amount of wealth invested in risky assets and the level of stock market participation, respectively. Conversely, rare disasters were found to bring down these rates, the change being severe for investors in the later years of the life-cycle. Furthermore, investors following time varying returns (return predictability) hedged background risks significantly better than the IID ones.

Size anomalies in EU bank stock returns

Mestrado em Finanças

Price manipulation: theoretical models and empirical investigation

Understanding why market manipulation is conducted, under which conditions it is the most profitable and investigating the magnitude of these practices are crucial questions for financial regulators. Closing price manipulation induced by derivatives’ expiration is the primary subject of this thesis. The first chapter provides a mathematical framework in continuous time to study the incentive to manipulate a set of securities induced by a derivative position. An agent holding a European-type contingent claim, depending on the price of a basket of underlying securities, is considered. The agent can affect the price of the underlying securities by trading on each of them before expiration. The elements of novelty are at least twofold: (1) a multi-asset market is considered; (2) the problem is solved by means of both classic optimisation and stochastic control techniques. Both linear and option payoffs are considered. In the second chapter an empirical investigation is conducted on the existence of expiration day effects on the UK equity market. Intraday data on FTSE 350 stocks over a six-year period from 2015-2020 are used. The results show that the expiration of index derivatives is associated with a rise in both trading activity and volatility, together with significant price distortions. The expiration of single stock options appears to have little to no impact on the underlying securities. The last chapter examines the existence of patterns in line with closing price manipulation of UK stocks on option expiration days. The main contributions are threefold: (1) this is one of the few empirical studies on manipulation induced by the options market; (2) proprietary equity orderbook and transaction data sets are used to define manipulation proxies, providing a more detailed analysis; (3) the behaviour of proprietary trading firms is studied. Despite the industry concerns, no evidence is found of this type of manipulative behaviour.

Merluccius hubbsi (Teleostei: Merlucciidae): stock identification based on reproductive biology in the south-southeast brazilian region

The Argentine hake, Merluccius hubbsi, a demersal-pelagic species found from Rio de Janeiro, Brazil to the Tierra del Fuego, Argentina, has become an important target of the Brazilian bottom-trawler fleet since 2001. Earlier studies focusing on the species have suggested that more than one stock might occur off the Brazilian coast, in accordance with environmental features. In order to evaluate this hypothesis, fish were collected from four different areas in the Brazilian waters in which the hake is distributed, during the summers and winters of 1996-2001 and 2004, the females being used to analyze and compare spatial-temporal variations in ovarian maturation. Gonad indexes were also applied for the same purpose. Results indicate a north-south spawning gradient occurring as from summer at around 21°S to winter near 34°S, leading to the identification of two distinct stocks: one located between 21°S and 29°S (Southeastern stock) and the other between 29°S and 34°S (Southern stock), this latter shared with Uruguay and Argentina. Brazilian stocks present clear signs of overexploitation, the situation calling for an urgent solution.

Multifractal regime transition in a modified minority game model

The search for more realistic modeling of financial time series reveals several stylized facts of real markets. In this work we focus on the multifractal properties found in price and index signals. Although the usual minority game (MG) models do not exhibit multifractality, we study here one of its variants that does. We show that the nonsynchronous MG models in the nonergodic phase is multifractal and in this sense, together with other stylized facts, constitute a better modeling tool. Using the structure function (SF) approach we detected the stationary and the scaling range of the time series generated by the MG model and, from the linear (non-linear) behavior of the SF we identified the fractal (multifractal) regimes. Finally, using the wavelet transform modulus maxima (WTMM) technique we obtained its multifractal spectrum width for different dynamical regimes. (C) 2009 Elsevier Ltd. All rights reserved.

E-contracting with price configuration for Web services and QoS

The large amount of information in electronic contracts hampers their establishment due to high complexity. An approach inspired in Software Product Line (PL) and based on feature modelling was proposed to make this process more systematic through information reuse and structuring. By assessing the feature-based approach in relation to a proposed set of requirements, it was showed that the approach does not allow the price of services and of Quality of Services (QoS) attributes to be considered in the negotiation and included in the electronic contract. Thus, this paper also presents an extension of such approach in which prices and price types associated to Web services and QoS levels are applied. An extended toolkit prototype is also presented as well as an experiment example of the proposed approach.

Role of price and enforcement in water allocation: Insights from Game Theory

As many countries are moving toward water sector reforms, practical issues of how water management institutions can better effect allocation, regulation, and enforcement of water rights have emerged. The problem of nonavailability of water to tailenders on an irrigation system in developing countries, due to unlicensed upstream diversions is well documented. The reliability of access or equivalently the uncertainty associated with water availability at their diversion point becomes a parameter that is likely to influence the application by users for water licenses, as well as their willingness to pay for licensed use. The ability of a water agency to reduce this uncertainty through effective water rights enforcement is related to the fiscal ability of the agency to monitor and enforce licensed use. In this paper, this interplay across the users and the agency is explored, considering the hydraulic structure or sequence of water use and parameters that define the users and the agency`s economics. The potential for free rider behavior by the users, as well as their proposals for licensed use are derived conditional on this setting. The analyses presented are developed in the framework of the theory of ""Law and Economics,`` with user interactions modeled as a game theoretic enterprise. The state of Ceara, Brazil, is used loosely as an example setting, with parameter values for the experiments indexed to be approximately those relevant for current decisions. The potential for using the ideas in participatory decision making is discussed. This paper is an initial attempt to develop a conceptual framework for analyzing such situations but with a focus on the reservoir-canal system water rights enforcement.

Phenolic composition of South American red wines classified according to their antioxidant activity, retail price and sensory quality

In this study, 73 South American red wines (Vitis vinifera) from 5 varietals were classified based on sensory quality, retail price and antioxidant activity and characterised in relation to their phenolic composition. ORAC and DPPH assays were assessed to determine the antioxidant activity, and sensory analysis was conducted by seven professional tasters using the Wine Spirits Education Trust`s structured scales. The use of multivariate statistical techniques allowed the identification of wines with the best combination of sensory characteristics, price and antioxidant activity. The most favourable varieties were Malbec, Cabernet Sauvignon, and Syrah produced in Chile and Argentina. Conversely, Pinot Noir wines displayed the lowest sensory characteristics and antioxidant activity. These results suggest that the volatile compounds may be the main substances responsible for differentiating red wines on the basis of sensory evaluation. (C) 2011 Elsevier Ltd. All rights reserved.

A framework for electricity price spike analysis with advanced data mining methods

There are many techniques for electricity market price forecasting. However, most of them are designed for expected price analysis rather than price spike forecasting. An effective method of predicting the occurrence of spikes has not yet been observed in the literature so far. In this paper, a data mining based approach is presented to give a reliable forecast of the occurrence of price spikes. Combined with the spike value prediction techniques developed by the same authors, the proposed approach aims at providing a comprehensive tool for price spike forecasting. In this paper, feature selection techniques are firstly described to identify the attributes relevant to the occurrence of spikes. A simple introduction to the classification techniques is given for completeness. Two algorithms: support vector machine and probability classifier are chosen to be the spike occurrence predictors and are discussed in details. Realistic market data are used to test the proposed model with promising results.

What are the economic prospects of developing aquaculture in Queensland to supply the low price white fillet market? Lessons from the US channel catfish industry

The farming of channel catfish (Ictalurus punctatus) is the largest (by volume and value) and most successful (in terms of market impact) aquaculture industry in the United States of America. Farmed channel catfish is the most consumed (in terms of volume per capita) fish fillet in the U.S. market. Within Australia, it has long been suggested by researchers and industry that silver perch (Bidyanus bidyanus) and possibly other endemic teraponid species possess similar biological attributes for aquaculture as channel catfish and may have the potential to generate a similar industry. The current teraponid industry in Australia, however, shows very little resemblance to the catfish industry, either in production style or market philosophy. A well established budget framework from the literature on U.S. channel catfish farming has been adapted for cost and climate conditions of the Burdekin region, Queensland, Australia. Breakeven prices for the hypothetical teraponid farms were found to be up to 50% higher than those published for catfish farms however were much lower than those reported for silver perch production in Australia using current, endemic styles of production. The breakeven prices for the hypothetical teraponid farms were most sensitive (in order of significance) to feed prices, production rates, interest rates, fingerling prices and electricity prices. At equivalent feed costs the costs of production between the hypothetical catfish farms in the Mississippi, U.S. and the hypothetical teraponid farms in the Burdekin, Australia were remarkably similar. The cost of feeds suitable for teraponid production in Australia are currently around double that of catfish feeds in the U.S. Issues currently hindering the development of a large scale teraponid industry in Australia are discussed.

Asset Price Instability and Policy Responses: The Legacy of Liberalisation

The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. Some analysts, notably Borio and Lowe, have called for 'subtle' changes to existing monetary targeting frameworks to try to deal with the problems of asset inflation and have attempted to developed indicators of financial vulnerability to aid this process. In contrast, this paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and institutional risks associated with policy errors are also significant. The fundamental premise that a liberalised financial system is based on 'efficient' market allocation cannot be overlooked. The corollary is that any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation.

Response to price and production risk: The case of Australian wheat

A model of Australian wheat grower supply response was specified under the constraints of price and yield uncertainty, risk aversion, partial adjustment, and quadratic costs. The model was solved to obtain area planted. The results of estimation indicate that risk arising from prices and climate have had a significant influence on producer decision making. The coefficient of relative risk aversion and short-run and long-run elasticities of supply with respect to price were calculated. Wheat growers' risk premium, expected at the start of the season for exposed price and yield risk, was 2.8 percent of revenue or 10.4 percent of profit as measured by producer surplus. (C) 2000 John Wiley & Sons, Inc.