Essays on the Modeling and Prediction of Volatility and Higher Moments of Stock Returns (summary section only)

One of the most fundamental and widely accepted ideas in finance is that investors are compensated through higher returns for taking on non-diversifiable risk. Hence the quantification, modeling and prediction of risk have been, and still are one of the most prolific research areas in financial economics. It was recognized early on that there are predictable patterns in the variance of speculative prices. Later research has shown that there may also be systematic variation in the skewness and kurtosis of financial returns. Lacking in the literature so far, is an out-of-sample forecast evaluation of the potential benefits of these new more complicated models with time-varying higher moments. Such an evaluation is the topic of this dissertation. Essay 1 investigates the forecast performance of the GARCH (1,1) model when estimated with 9 different error distributions on Standard and Poor’s 500 Index Future returns. By utilizing the theory of realized variance to construct an appropriate ex post measure of variance from intra-day data it is shown that allowing for a leptokurtic error distribution leads to significant improvements in variance forecasts compared to using the normal distribution. This result holds for daily, weekly as well as monthly forecast horizons. It is also found that allowing for skewness and time variation in the higher moments of the distribution does not further improve forecasts. In Essay 2, by using 20 years of daily Standard and Poor 500 index returns, it is found that density forecasts are much improved by allowing for constant excess kurtosis but not improved by allowing for skewness. By allowing the kurtosis and skewness to be time varying the density forecasts are not further improved but on the contrary made slightly worse. In Essay 3 a new model incorporating conditional variance, skewness and kurtosis based on the Normal Inverse Gaussian (NIG) distribution is proposed. The new model and two previously used NIG models are evaluated by their Value at Risk (VaR) forecasts on a long series of daily Standard and Poor’s 500 returns. The results show that only the new model produces satisfactory VaR forecasts for both 1% and 5% VaR Taken together the results of the thesis show that kurtosis appears not to exhibit predictable time variation, whereas there is found some predictability in the skewness. However, the dynamic properties of the skewness are not completely captured by any of the models.

Modeling and Forecasting Implied Volatility: Implications for Trading, Pricing, and Risk Management

Modeling and forecasting of implied volatility (IV) is important to both practitioners and academics, especially in trading, pricing, hedging, and risk management activities, all of which require an accurate volatility. However, it has become challenging since the 1987 stock market crash, as implied volatilities (IVs) recovered from stock index options present two patterns: volatility smirk(skew) and volatility term-structure, if the two are examined at the same time, presents a rich implied volatility surface (IVS). This implies that the assumptions behind the Black-Scholes (1973) model do not hold empirically, as asset prices are mostly influenced by many underlying risk factors. This thesis, consists of four essays, is modeling and forecasting implied volatility in the presence of options markets’ empirical regularities. The first essay is modeling the dynamics IVS, it extends the Dumas, Fleming and Whaley (DFW) (1998) framework; for instance, using moneyness in the implied forward price and OTM put-call options on the FTSE100 index, a nonlinear optimization is used to estimate different models and thereby produce rich, smooth IVSs. Here, the constant-volatility model fails to explain the variations in the rich IVS. Next, it is found that three factors can explain about 69-88% of the variance in the IVS. Of this, on average, 56% is explained by the level factor, 15% by the term-structure factor, and the additional 7% by the jump-fear factor. The second essay proposes a quantile regression model for modeling contemporaneous asymmetric return-volatility relationship, which is the generalization of Hibbert et al. (2008) model. The results show strong negative asymmetric return-volatility relationship at various quantiles of IV distributions, it is monotonically increasing when moving from the median quantile to the uppermost quantile (i.e., 95%); therefore, OLS underestimates this relationship at upper quantiles. Additionally, the asymmetric relationship is more pronounced with the smirk (skew) adjusted volatility index measure in comparison to the old volatility index measure. Nonetheless, the volatility indices are ranked in terms of asymmetric volatility as follows: VIX, VSTOXX, VDAX, and VXN. The third essay examines the information content of the new-VDAX volatility index to forecast daily Value-at-Risk (VaR) estimates and compares its VaR forecasts with the forecasts of the Filtered Historical Simulation and RiskMetrics. All daily VaR models are then backtested from 1992-2009 using unconditional, independence, conditional coverage, and quadratic-score tests. It is found that the VDAX subsumes almost all information required for the volatility of daily VaR forecasts for a portfolio of the DAX30 index; implied-VaR models outperform all other VaR models. The fourth essay models the risk factors driving the swaption IVs. It is found that three factors can explain 94-97% of the variation in each of the EUR, USD, and GBP swaption IVs. There are significant linkages across factors, and bi-directional causality is at work between the factors implied by EUR and USD swaption IVs. Furthermore, the factors implied by EUR and USD IVs respond to each others’ shocks; however, surprisingly, GBP does not affect them. Second, the string market model calibration results show it can efficiently reproduce (or forecast) the volatility surface for each of the swaptions markets.

Bioremediation of diesel oil contaminated soil and water

Diesel spills contaminate aquatic and terrestrial environments. To prevent the environmental and health risks, the remediation needs to be advanced. Bioremediation, i.e., degradation by microbes, is one of the suitable methods for cleaning diesel contamination. In monitored natural attenuation technique are natural processes in situ combined, including bioremediation, volatilization, sorption, dilution and dispersion. Soil bacteria are capable of adapting to degrade environmental pollutants, but in addition, some soil types may have indigenous bacteria that are naturally suitable for degradation. The objectives for this work were (1) to find a feasible and economical technique to remediate oil spilled into Baltic Sea water and (2) to bioremediate soil contaminated by diesel oil. Moreover, the aim was (3) to study the potential for natural attenuation and the indigenous bacteria in soil, and possible adaptation to degrade diesel hydrocarbons. In the aquatic environment, the study concentrated on diesel oil sorption to cotton grass fiber, a natural by-product of peat harvesting. The impact of diesel pollution was followed in bacteria, phytoplankton and mussels. In a terrestrial environment, the focus was to compare the methods of enhanced biodegradation (biostimulation and bioaugmentation), and to study natural attenuation of oil hydrocarbons in different soil types and the effect that a history of previous contamination may have on the bioremediation potential. (1) In the aquatic environment, rapid removal of diesel oil was significant for survival of tested species and thereby diversity maintained. Cotton grass not only absorbed the diesel but also benefited the bacterial growth by providing a large colonizable surface area and hence oil-microbe contact area. Therefore use of this method would enhance bioremediation of diesel spills. (2) Biostimulation enhances bioremediation, and (3) indigenous diesel-degrading bacteria are present in boreal environments, so microbial inocula are not always needed. In the terrestrial environment experiments, the combination of aeration and addition of slowly released nitrogen advanced the oil hydrocarbon degradation. Previous contamination of soil gives the bacterial community the potential for rapid adaptation and efficient degradation of the same type of contaminant. When the freshly contaminated site needs addition of diesel degraders, previously contaminated and remediated soil could be used as a bacterial inoculum. Another choice of inoculum could be conifer forest soil, which provides a plentiful population of degraders, and based on the present results, could be considered as a safe non-polluted inoculum. According to the findings in this thesis, bioremediation (microbial degradation) and monitored natural attenuation (microbial, physical and chemical degradation) are both suitable techniques for remediation of diesel-contaminated sites in Finland.

Modeling and Field Oriented Control of Salient Pole Wound Field Synchronous Machine in Stator Flux Coordinates

This paper describes the field oriented control of a salient pole wound field synchronous machine in stator flux coordinates. The procedure for derivation of flux linkage equations along any general rotating axes including stator flux axes is given. The stator flux equations are used to identify the cross-coupling occurring between the axes due to saliency in the machine. The coupling terms are canceled as feedforward terms in the generation of references for current controllers to achieve good decoupling during transients. The design of current controller for stator-flux-oriented control is presented. This paper proposes the method of extending rotor flux closed loop observer for sensorless control of wound field synchronous machine. This paper also proposes a new sensorless control by using stator flux closed loop observer and estimation of torque angle using stator current components in stator flux coordinates. Detailed experimental results from a sensorless 15.8 hp salient pole wound field synchronous machine drive are presented to demonstrate the performance of the proposed control strategy from a low speed of 0.8 Hz to 50 Hz.

Modeling and design of a solar thermal system for hybrid cooking application

This paper proposes a hybrid solar cooking system where the solar energy is brought to the kitchen. The energy source is a combination of the solar thermal energy and the Liquefied Petroleum Gas (LPG) that is in common use in kitchens. The solar thermal energy is transferred to the kitchen by means of a circulating fluid. The transfer of solar heat is a twofold process wherein the energy from the collector is transferred first to an intermediate energy storage buffer and the energy is subsequently transferred from the buffer to the cooking load. There are three parameters that are controlled in order to maximize the energy transfer from the collector to the load viz, the fluid flow rate from collector to buffer, fluid flow rate from buffer to load and the diameter of the pipes. This is a complex multi energy domain system comprising energy flow across several domains such as thermal, electrical and hydraulic. The entire system is modeled using the bond graph approach with seamless integration of the power flow in these domains. A method to estimate different parameters of the practical cooking system is also explained. Design and life cycle costing of the system is also discussed. The modeled system is simulated and the results are validated experimentally. (C) 2010 Elsevier Ltd. All rights reserved.

Spatial distribution of oil in groundnut and sunflower seeds by nuclear magnetic resonance imaging

The nuclear magnetic resonance imaging technique has been used to obtain images of different transverse and vertical sections in groundnut and sunflower seeds. Separate images have been obtained for oil and water components in the seeds. The spatial distribution of oil and water inside the seed has been obtained from the detailed analysis of the images. In the immature groundnut seeds obtained commercially, complementary oil and water distributions have been observed. Attempts have been made to explain these results.

The structures of bacteriorhodopsin with different retinal-Schiff base orientations--computer modeling and energy minimization studies

Bacteriorhodopsin has been the subject of intense study in order to understand its photochemical function. The recent atomic model proposed by Henderson and coworkers based on electron cryo-microscopic studies has helped in understanding many of the structural and functional aspects of bacteriorhodopsin. However, the accuracy of the positions of the side chains is not very high since the model is based on low-resolution data. In this study, we have minimized the energy of this structure of bacteriorhodopsin and analyzed various types of interactions such as - intrahelical and interhelical hydrogen bonds and retinal environment. In order to understand the photochemical action, it is necessary to obtain information on the structures adopted at the intermediate states. In this direction, we have generated some intermediate structures taking into account certain experimental data, by computer modeling studies. Various isomers of retinal with 13-cis and/or 15-cis conformations and all possible staggered orientations of Lys-216 side chain were generated. The resultant structures were examined for the distance between Lys-216-schiff base nitrogen and the carboxylate oxygen atoms of Asp-96 - a residue which is known to reprotonate the schiff base at later stages of photocycle. Some of the structures were selected on the basis of suitable retinal orientation and the stability of these structures were tested by energy minimization studies. Further, the minimized structures are analyzed for the hydrogen bond interactions and retinal environment and the results are compared with those of the minimized rest state structure. The importance of functional groups in stabilizing the structure of bacteriorhodopsin and in participating dynamically during the photocycle have been discussed.

Analysis, Design, Modeling, and Implementation of an Active Clamp HF Link Converter

This paper deals with the system oriented analysis, design, modeling, and implementation of active clamp HF link three phase converter. The main advantage of the topology is reduced size, weight, and cost of the isolation transformer. However, violation of basic power conversion rules due to presence of the leakage inductance in the HF transformer causes over voltage stresses across the cycloconverter devices. It makes use of the snubber circuit necessary in such topologies. The conventional RCD snubbers are dissipative in nature and hence inefficient. The efficiency of the system is greatly improved by using regenerative snubber or active clamp circuit. It consists of an active switching device with an anti-parallel diode and one capacitor to absorb the energy stored in the leakage inductance of the isolation transformer and to regenerate the same without affecting circuit performance. The turn on instant and duration of the active device are selected such that it requires simple commutation requirements. The time domain expressions for circuit dynamics, design criteria of the snubber capacitor with two conflicting constrains (over voltage stress across the devices and the resonating current duration), the simulation results based on generalized circuit model and the experimental results based on laboratory prototype are presented.

Modeling and control of unified power flow controller for transient stability

FACTS controllers are emerging as viable and economic solutions to the problems of large interconnected ne networks, which can endanger the system security. These devices are characterized by their fast response, absence of inertia, and minimum maintenance requirements. Thyristor controlled equipment like Thyristor Controlled Series Capacitor (TCSC), Static Var Compensator (SVC), Thyristor Controlled Phase angle Regulator (TCPR) etc. which involve passive elements result in devices of large sizes with substantial cost and significant labour for installation. An all solid-state device using GTOs leads to reduction in equipment size and has improved performance. The Unified Power Flow Controller (UPFC) is a versatile controller which can be used to control the active and reactive power in the Line independently. The concept of UPFC makes it possible to handle practically all power flow control and transmission line compensation problems, using solid-state controllers, which provide functional flexibility, generally not attainable by conventional thyristor controlled systems. In this paper, we present the development of a control scheme for the series injected voltage of the UPFC to damp the power oscillations and improve transient stability in a power system. (C) 1998 Elsevier Science Ltd. All rights reserved.

Multi-Mode Phonon-Controlled Field Emission from Carbon Nanotubes: Modeling and Experiments

The main idea proposed in this paper is that in a vertically aligned array of short carbon nanotubes (CNTs) grown on a metal substrate, we consider a frequency dependent electric field, so that the mode-specific propagation of phonons, in correspondence with the strained band structure and the dispersion curves, take place. We perform theoretical calculations to validate this idea with a view of optimizing the field emission behavior of the CNT array. This is the first approach of its kind, and is in contrast to the the conventional approach where a DC bias voltage is applied in order to observe field emission. A first set of experimental results presented in this paper gives a clear indication that phonon-assisted control of field emission current in CNT based thin film diode is possible.

A PPCA based non-parametric modeling and retrieval of PD signal buried in excessive noise

The problem of on-line recognition and retrieval of relatively weak industrial signals such as partial discharges (PD), buried in excessive noise, has been addressed in this paper. The major bottleneck being the recognition and suppression of stochastic pulsive interference (PI) due to the overlapping broad band frequency spectrum of PI and PD pulses. Therefore, on-line, onsite, PD measurement is hardly possible in conventional frequency based DSP techniques. The observed PD signal is modeled as a linear combination of systematic and random components employing probabilistic principal component analysis (PPCA) and the pdf of the underlying stochastic process is obtained. The PD/PI pulses are assumed as the mean of the process and modeled instituting non-parametric methods, based on smooth FIR filters, and a maximum aposteriori probability (MAP) procedure employed therein, to estimate the filter coefficients. The classification of the pulses is undertaken using a simple PCA classifier. The methods proposed by the authors were found to be effective in automatic retrieval of PD pulses completely rejecting PI.