Pricing derivatives with stochastic volatility

This Ph.D. thesis contains 4 essays in mathematical finance with a focus on pricing Asian option (Chapter 4), pricing futures and futures option (Chapter 5 and Chapter 6) and time dependent volatility in futures option (Chapter 7). In Chapter 4, the applicability of the Albrecher et al.(2005)'s comonotonicity approach was investigated in the context of various benchmark models for equities and com- modities. Instead of classical Levy models as in Albrecher et al.(2005), the focus is the Heston stochastic volatility model, the constant elasticity of variance (CEV) model and the Schwartz (1997) two-factor model. It is shown that the method delivers rather tight upper bounds for the prices of Asian Options in these models and as a by-product delivers super-hedging strategies which can be easily implemented. In Chapter 5, two types of three-factor models were studied to give the value of com- modities futures contracts, which allow volatility to be stochastic. Both these two models have closed-form solutions for futures contracts price. However, it is shown that Model 2 is better than Model 1 theoretically and also performs very well empiri- cally. Moreover, Model 2 can easily be implemented in practice. In comparison to the Schwartz (1997) two-factor model, it is shown that Model 2 has its unique advantages; hence, it is also a good choice to price the value of commodity futures contracts. Fur- thermore, if these two models are used at the same time, a more accurate price for commodity futures contracts can be obtained in most situations. In Chapter 6, the applicability of the asymptotic approach developed in Fouque et al.(2000b) was investigated for pricing commodity futures options in a Schwartz (1997) multi-factor model, featuring both stochastic convenience yield and stochastic volatility. It is shown that the zero-order term in the expansion coincides with the Schwartz (1997) two-factor term, with averaged volatility, and an explicit expression for the first-order correction term is provided. With empirical data from the natural gas futures market, it is also demonstrated that a significantly better calibration can be achieved by using the correction term as compared to the standard Schwartz (1997) two-factor expression, at virtually no extra effort. In Chapter 7, a new pricing formula is derived for futures options in the Schwartz (1997) two-factor model with time dependent spot volatility. The pricing formula can also be used to find the result of the time dependent spot volatility with futures options prices in the market. Furthermore, the limitations of the method that is used to find the time dependent spot volatility will be explained, and it is also shown how to make sure of its accuracy.

Essays on Uncertainty, Imperfect Information, and Investment Dynamics

Understanding how imperfect information affects firms' investment decision helps answer important questions in economics, such as how we may better measure economic uncertainty; how firms' forecasts would affect their decision-making when their beliefs are not backed by economic fundamentals; and how important are the business cycle impacts of changes in firms' productivity uncertainty in an environment of incomplete information. This dissertation provides a synthetic answer to all these questions, both empirically and theoretically. The first chapter, provides empirical evidence to demonstrate that survey-based forecast dispersion identifies a distinctive type of second moment shocks different from the canonical volatility shocks to productivity, i.e. uncertainty shocks. Such forecast disagreement disturbances can affect the distribution of firm-level beliefs regardless of whether or not belief changes are backed by changes in economic fundamentals. At the aggregate level, innovations that increase the dispersion of firms' forecasts lead to persistent declines in aggregate investment and output, which are followed by a slow recovery. On the contrary, the larger dispersion of future firm-specific productivity innovations, the standard way to measure economic uncertainty, delivers the ``wait and see" effect, such that aggregate investment experiences a sharp decline, followed by a quick rebound, and then overshoots. At the firm level, data uncovers that more productive firms increase investments given rises in productivity dispersion for the future, whereas investments drop when firms disagree more about the well-being of their future business conditions. These findings challenge the view that the dispersion of the firms' heterogeneous beliefs captures the concept of economic uncertainty, defined by a model of uncertainty shocks. The second chapter presents a general equilibrium model of heterogeneous firms subject to the real productivity uncertainty shocks and informational disagreement shocks. As firms cannot perfectly disentangle aggregate from idiosyncratic productivity because of imperfect information, information quality thus drives the wedge of difference between the unobserved productivity fundamentals, and the firms' beliefs about how productive they are. Distribution of the firms' beliefs is no longer perfectly aligned with the distribution of firm-level productivity across firms. This model not only explains why, at the macro and micro level, disagreement shocks are different from uncertainty shocks, as documented in Chapter 1, but helps reconcile a key challenge faced by the standard framework to study economic uncertainty: a trade-off between sizable business cycle effects due to changes in uncertainty, and the right amount of pro-cyclicality of firm-level investment rate dispersion, as measured by its correlation with the output cycles.

Volatility Spillover and Multivariate Volatility Impulse Response Analysis of GFC News Events

This paper applies two measures to assess spillovers across markets: the Diebold Yilmaz (2012) Spillover Index and the Hafner and Herwartz (2006) analysis of multivariate GARCH models using volatility impulse response analysis. We use two sets of data, daily realized volatility estimates taken from the Oxford Man RV library, running from the beginning of 2000 to October 2016, for the S&P500 and the FTSE, plus ten years of daily returns series for the New York Stock Exchange Index and the FTSE 100 index, from 3 January 2005 to 31 January 2015. Both data sets capture both the Global Financial Crisis (GFC) and the subsequent European Sovereign Debt Crisis (ESDC). The spillover index captures the transmission of volatility to and from markets, plus net spillovers. The key difference between the measures is that the spillover index captures an average of spillovers over a period, whilst volatility impulse responses (VIRF) have to be calibrated to conditional volatility estimated at a particular point in time. The VIRF provide information about the impact of independent shocks on volatility. In the latter analysis, we explore the impact of three different shocks, the onset of the GFC, which we date as 9 August 2007 (GFC1). It took a year for the financial crisis to come to a head, but it did so on 15 September 2008, (GFC2). The third shock is 9 May 2010. Our modelling includes leverage and asymmetric effects undertaken in the context of a multivariate GARCH model, which are then analysed using both BEKK and diagonal BEKK (DBEKK) models. A key result is that the impact of negative shocks is larger, in terms of the effects on variances and covariances, but shorter in duration, in this case a difference between three and six months.

The meaning of implied volatility in pricing stock options traded in options markets

Ph.D. in the Faculty of Business Administration

Synthetic portfolio for event studies: Estimating the effects of volatility call auctions

We propose a method denoted as synthetic portfolio for event studies in market microstructure that is particularly interesting to use with high frequency data and thinly traded markets. The method is based on Synthetic Control Method and provides a robust data driven method to build a counterfactual for evaluating the effects of the volatility call auctions. We find that SMC could be used if the loss function is defined as the difference between the returns of the asset and the returns of a synthetic portfolio. We apply SCM to test the performance of the volatility call auction as a circuit breaker in the context of an event study. We find that for Colombian Stock Market securities, the asynchronicity of intraday data reduces the analysis to a selected group of stocks, however it is possible to build a tracking portfolio. The realized volatility increases after the auction, indicating that the mechanism is not enhancing the price discovery process.

The EU ban on uncovered sovereign credit default swaps: assessing impacts on liquidity, volatility and price discovery

This article addresses the effects of the prohibition against naked CDS buying implemented by the European Union in November 2012. Three aspects of market quality are analyzed: liquidity, volatility, and price informativeness. Overall, our results suggest that the ban produced negative effects on liquidity and price informativeness. First, we find that in territories within the scope of the EU regulation, the bid–ask spreads on sovereign CDS contracts rose after the ban, but fell for countries outside its bounds. Open interest declined for both groups of CDS reference entities in our sample, but significantly more in the constraint group. Price delay increased more prominently for countries affected by the ban, whereas price precision decreased for these countries while increasing for CDSs written on other sovereign reference entities. Most notably, our findings indicate that hese negative effects were more pronounced amid reference entities exhibiting lower credit risk. With respect to volatility, the evidence suggests that the ban was successful in stabilizing the CDS market in that volatility decreased, particularly for contracts written on riskier CDS entities.

Aplicações de cromatografia líquida de alta eficiência para o estudo de poluentes orgânicos emergentes

Emerging organic pollutants (EOP) include many environmental contaminants based on commercial products such as pharmaceuticals, personal care products, detergents, gasoline, polymers, etc. EOP may be candidates for future regulation as they offer potential risk to environmental and human health due to their continual entrance into the environment and to the fact that even the most modern wastewater treatment plants are not able to totally transform / remove these compounds. High performance liquid chromatography is recommended to separate emerging organic pollutants with characteristics of high polarity and low volatility, especially pharmaceuticals, from environmental matrices.

Topiramate-associated acute, bilateral, angle-closure glaucoma: case report

This paper describes a topiramate induced acute bilateral angle-closure glaucoma. This rare adverse effect is an idiosyncratic reaction characterized by uveal effusion and lens forward displacement, leading to increased intraocular pressure and vision loss. We describe a 55 year-old white woman with migraine, spasmodic torticollis and essential tremor, who developed bilateral acute angle-closure glaucoma, one week after starting topiramate 25 mg/day. She was seen at the Ophthalmology Emergency Department of the Fundação João Penido Burnier (Campinas, SP, Brazil) with a 4 hours history of blurry vision, ocular pain and bright flashes vision. Slit lamp examination revealed moderate conjunctival injection and corneal edema, and shallow anterior chambers. Intraocular pressure was 48 mmHg in both eyes. Fundoscopic examination findings were normal. She was treated with timolol, brimonidine, dorzolamide, pilocarpine, prednisone acetate eye drops and acetazolamide. One hour after those measures, as the intraocular pressure was 30 mmHg, she received a manitol intravenous injection and the intraocular pressure normalized. After 24 hours an iridotomy with Yag laser was performed. Topiramate was discontinued and she was totally recovered after one week.

Modelos de volatilidade estocástica em séries financeiras: uma aplicação para o IBOVESPA

Neste artigo apresentamos uma análise Bayesiana para o modelo de volatilidade estocástica (SV) e uma forma generalizada deste, cujo objetivo é estimar a volatilidade de séries temporais financeiras. Considerando alguns casos especiais dos modelos SV usamos algoritmos de Monte Carlo em Cadeias de Markov e o software WinBugs para obter sumários a posteriori para as diferentes formas de modelos SV. Introduzimos algumas técnicas Bayesianas de discriminação para a escolha do melhor modelo a ser usado para estimar as volatilidades e fazer previsões de séries financeiras. Um exemplo empírico de aplicação da metodologia é introduzido com a série financeira do IBOVESPA.

Safety Assessment of Potentially Inappropriate Medications (PIM) use in Older People and the Factors Associated with Hospital Admission

Purpose: Potentially Inappropriate Medications (PIM) use in elderly people may be responsible for the development of Adverse Drug Reaction (ADR) which, when severe, leads to hospital admissions. Objectives: to estimate the prevalence of elderly who had used PIM before being admitted to hospital and to identify the risk factors and the hospitalizations related to ADR arising from PIM. Methods: A descriptive and cross-sectional study was performed in the internal medicine ward of a teaching hospital (Brazil), in 2008. With the aid of a validated form, patients aged >= 60 years, with length of hospital stay >= 24 hours, were interviewed about drugs taken prior to the hospital admission and the complaints/reasons for hospitalization. Results: 19.1% (59/308) of older patients had taken PIM before hospital admission and in 4.9%; there were a causal relation between the PIM taken and the complaint reported. PIM responsible for admissions were: amiodarone, amitriptyline, cimetidine, clonidine, diazepam, digoxin, estrogen, fluoxetine, lorazepam, short-acting nifedipine and propranolol. 47.0% of the clinical manifestations of PIM-related ADR were: dizziness, fatigue, digoxin toxicity and erythema. Only polypharmacy was detected as a risk factor for the occurrence of ADR of PIM (p = 0.02). Conclusion: PIM use in elderly people is not a risk factor for ADR-related hospital admission. Probably, severe ADR, which lead to hospitalizations of older people, can be explained by idiosyncratic response or the predisposition of these patients to develop adverse drug events, whether or not drugs are classed as PIM.

The non-equilibrium nature of culinary evolution

Food is an essential part of civilization, with a scope that ranges from the biological to the economic and cultural levels. Here, we study the statistics of ingredients and recipes taken from Brazilian, British, French and Medieval cookery books. We find universal distributions with scale invariant behaviour. We propose a copy-mutate process to model culinary evolution that fits our empirical data very well. We find a cultural 'founder effect' produced by the non-equilibrium dynamics of the model. Both the invariant and idiosyncratic aspects of culture are accounted for by our model, which may have applications in other kinds of evolutionary processes.

Minor and Unsystematic Cortical Topographic Changes of Attention Correlates between Modalities

In this study we analyzed the topography of induced cortical oscillations in 20 healthy individuals performing simple attention tasks. We were interested in qualitatively replicating our recent findings on the localization of attention-induced beta bands during a visual task [1], and verifying whether significant topographic changes would follow the change of attention to the auditory modality. We computed corrected latency averaging of each induced frequency bands, and modeled their generators by current density reconstruction with Lp-norm minimization. We quantified topographic similarity between conditions by an analysis of correlations, whereas the inter-modality significant differences in attention correlates were illustrated in each individual case. We replicated the qualitative result of highly idiosyncratic topography of attention-related activity to individuals, manifested both in the beta bands, and previously studied slow potential distributions [2]. Visual inspection of both scalp potentials and distribution of cortical currents showed minor changes in attention-related bands with respect to modality, as compared to the theta and delta bands, known to be major contributors to the sensory-related potentials. Quantitative results agreed with visual inspection, supporting to the conclusion that attention-related activity does not change much between modalities, and whatever individual changes do occur, they are not systematic in cortical localization across subjects. We discuss our results, combined with results from other studies that present individual data, with respect to the function of cortical association areas.

An overview of the Amazonian Aerosol Characterization Experiment 2008 (AMAZE-08)

The Amazon Basin provides an excellent environment for studying the sources, transformations, and properties of natural aerosol particles and the resulting links between biological processes and climate. With this framework in mind, the Amazonian Aerosol Characterization Experiment (AMAZE-08), carried out from 7 February to 14 March 2008 during the wet season in the central Amazon Basin, sought to understand the formation, transformations, and cloud-forming properties of fine-and coarse-mode biogenic aerosol particles, especially as related to their effects on cloud activation and regional climate. Special foci included (1) the production mechanisms of secondary organic components at a pristine continental site, including the factors regulating their temporal variability, and (2) predicting and understanding the cloud-forming properties of biogenic particles at such a site. In this overview paper, the field site and the instrumentation employed during the campaign are introduced. Observations and findings are reported, including the large-scale context for the campaign, especially as provided by satellite observations. New findings presented include: (i) a particle number-diameter distribution from 10 nm to 10 mu m that is representative of the pristine tropical rain forest and recommended for model use; (ii) the absence of substantial quantities of primary biological particles in the submicron mode as evidenced by mass spectral characterization; (iii) the large-scale production of secondary organic material; (iv) insights into the chemical and physical properties of the particles as revealed by thermodenuder-induced changes in the particle number-diameter distributions and mass spectra; and (v) comparisons of ground-based predictions and satellite-based observations of hydrometeor phase in clouds. A main finding of AMAZE-08 is the dominance of secondary organic material as particle components. The results presented here provide mechanistic insight and quantitative parameters that can serve to increase the accuracy of models of the formation, transformations, and cloud-forming properties of biogenic natural aerosol particles, especially as related to their effects on cloud activation and regional climate.

A hybrid commodity price-forecasting model applied to the sugar-alcohol sector

Accurate price forecasting for agricultural commodities can have significant decision-making implications for suppliers, especially those of biofuels, where the agriculture and energy sectors intersect. Environmental pressures and high oil prices affect demand for biofuels and have reignited the discussion about effects on food prices. Suppliers in the sugar-alcohol sector need to decide the ideal proportion of ethanol and sugar to optimise their financial strategy. Prices can be affected by exogenous factors, such as exchange rates and interest rates, as well as non-observable variables like the convenience yield, which is related to supply shortages. The literature generally uses two approaches: artificial neural networks (ANNs), which are recognised as being in the forefront of exogenous-variable analysis, and stochastic models such as the Kalman filter, which is able to account for non-observable variables. This article proposes a hybrid model for forecasting the prices of agricultural commodities that is built upon both approaches and is applied to forecast the price of sugar. The Kalman filter considers the structure of the stochastic process that describes the evolution of prices. Neural networks allow variables that can impact asset prices in an indirect, nonlinear way, what cannot be incorporated easily into traditional econometric models.

Involvement of oxidative stress in the hepatotoxicity induced by aromatic antiepileptic drugs

The use of the classic aromatic antiepileptic drugs (AAEDs) has recently been expanded to a broad spectrum of psychiatric and neurological disorders. However, the clinical use of these drugs is limited by several adverse effects, mainly idiosyncratic hepatotoxicity. AAED-induced hepatotoxicity has been attributed to a defective detoxification by the epoxide hydrolase and accumulation of arene oxides. The underlying mechanism has been proposed as immune-mediated, but direct toxicity has also been suggested. In general, idiosyncratic drug-induced hepatotoxicity may be mediated, at least in part, by oxidative stress. On the other hand, the oxidative stress induced by the AAED metabolites has not been demonstrated yet. Therefore, in the present study we have evaluated the induction of oxidative stress by three classical AAEDs: carbamazepine. phenytoin and phenobarbital as well as by their metabolites. The toxic effects of the metabolites were evaluated by incubating the drug with rat liver microsomes. The AAED-induced oxidative stress was demonstrated by the increased malondialdehyde levels, oxidation of cardiolipin; oxidation of sulfhydryl proteins and alteration of the cellular redox status. Results suggest that the hepatotoxicity associated with AAED might be mediated by the oxidative stress induced by the drugs metabolites. (C) 2008 Elsevier Ltd. All rights reserved