Geometric and long run aspects of Granger causality

This paper extends multivariate Granger causality to take into account the subspacesalong which Granger causality occurs as well as long run Granger causality. The propertiesof these new notions of Granger causality, along with the requisite restrictions, are derivedand extensively studied for a wide variety of time series processes including linear invertibleprocess and VARMA. Using the proposed extensions, the paper demonstrates that: (i) meanreversion in L2 is an instance of long run Granger non-causality, (ii) cointegration is a specialcase of long run Granger non-causality along a subspace, (iii) controllability is a special caseof Granger causality, and finally (iv) linear rational expectations entail (possibly testable)Granger causality restriction along subspaces.

Economic shocks and civil conflict: A comment

Miguel, Satyanath, and Sergenti (2004) argue that lowerrainfall levels and negative rainfall shocks increase conflictrisk in Sub-Saharan Africa. This conclusion rests on theirfinding of a negative correlation between conflict in t andrainfall growth between t-1 and t-2. I argue that this findingis driven by a positive correlation between conflict in t andrainfall levels in t-2. If lower rainfall levels or negativerainfall shocks increased conflict, one might have expectedMSS s finding to reflect a negative correlation betweenconflict in t and rainfall levels in t-1. In the latest data,conflict is unrelated to rainfall.

Modelos de tasas de interes en Chile: una revisión

Con este trabajo revisamos los Modelos de niveles de las tasas de intereses en Chile. Además de los Modelos de Nivel tradicionales por Chan, Karoly, Longstaff y Lijadoras (1992) en EE. UU, y Parisi (1998) en Chile, por el método de Probabilidad Maximun permitimos que la volatilidad condicional también incluya los procesos inesperados de la información (el modelo GARCH ) y también que la volatilidad sea la función del nivel de la tasa de intereses (modelo TVP-NIVELE) como en Brenner, Harjes y la Crona (1996). Para esto usamos producciones de mercado de bonos de reconocimiento, en cambio las producciones mensuales medias de subasta PDBC, y la ampliación del tamaño y la frecuencia de la muestra a 4 producciones semanales con términos(condiciones) diferentes a la madurez: 1 año, 5 años, 10 años y 15 años. Los resultados principales del estudio pueden ser resumidos en esto: la volatilidad de los cambios inesperados de las tarifas depende positivamente del nivel de las tarifas, sobre todo en el modelo de TVP-NIVEL. Obtenemos pruebas de reversión tacañas, tal que los incrementos en las tasas de intereses no eran independientes, contrariamente a lo obtenido por Brenner. en EE. UU. Los modelos de NIVELES no son capaces de ajustar apropiadamente la volatilidad en comparación con un modelo GARCH (1,1), y finalmente, el modelo de TVP-NIVEL no vence los resultados del modelo GARCH (1,1)

Modelos de tasas de interes en Chile: una revisión

Con este trabajo revisamos los Modelos de niveles de las tasas de intereses en Chile. Además de los Modelos de Nivel tradicionales por Chan, Karoly, Longstaff y Lijadoras (1992) en EE. UU, y Parisi (1998) en Chile, por el método de Probabilidad Maximun permitimos que la volatilidad condicional también incluya los procesos inesperados de la información (el modelo GARCH ) y también que la volatilidad sea la función del nivel de la tasa de intereses (modelo TVP-NIVELE) como en Brenner, Harjes y la Crona (1996). Para esto usamos producciones de mercado de bonos de reconocimiento, en cambio las producciones mensuales medias de subasta PDBC, y la ampliación del tamaño y la frecuencia de la muestra a 4 producciones semanales con términos(condiciones) diferentes a la madurez: 1 año, 5 años, 10 años y 15 años. Los resultados principales del estudio pueden ser resumidos en esto: la volatilidad de los cambios inesperados de las tarifas depende positivamente del nivel de las tarifas, sobre todo en el modelo de TVP-NIVEL. Obtenemos pruebas de reversión tacañas, tal que los incrementos en las tasas de intereses no eran independientes, contrariamente a lo obtenido por Brenner. en EE. UU. Los modelos de NIVELES no son capaces de ajustar apropiadamente la volatilidad en comparación con un modelo GARCH (1,1), y finalmente, el modelo de TVP-NIVEL no vence los resultados del modelo GARCH (1,1)

Essays in equilibrium asset pricing

Introduction This dissertation consists of three essays in equilibrium asset pricing. The first chapter studies the asset pricing implications of a general equilibrium model in which real investment is reversible at a cost. Firms face higher costs in contracting than in expanding their capital stock and decide to invest when their productive capital is scarce relative to the overall capital of the economy. Positive shocks to the capital of the firm increase the size of the firm and reduce the value of growth options. As a result, the firm is burdened with more unproductive capital and its value lowers with respect to the accumulated capital. The optimal consumption policy alters the optimal allocation of resources and affects firm's value, generating mean-reverting dynamics for the M/B ratios. The model (1) captures convergence of price-to-book ratios -negative for growth stocks and positive for value stocks - (firm migration), (2) generates deviations from the classic CAPM in line with the cross-sectional variation in expected stock returns and (3) generates a non-monotone relationship between Tobin's q and conditional volatility consistent with the empirical evidence. The second chapter proposes a standard portfolio-choice problem with transaction costs and mean reversion in expected returns. In the presence of transactions costs, no matter how small, arbitrage activity does not necessarily render equal all riskless rates of return. When two such rates follow stochastic processes, it is not optimal immediately to arbitrage out any discrepancy that arises between them. The reason is that immediate arbitrage would induce a definite expenditure of transactions costs whereas, without arbitrage intervention, there exists some, perhaps sufficient, probability that these two interest rates will come back together without any costs having been incurred. Hence, one can surmise that at equilibrium the financial market will permit the coexistence of two riskless rates that are not equal to each other. For analogous reasons, randomly fluctuating expected rates of return on risky assets will be allowed to differ even after correction for risk, leading to important violations of the Capital Asset Pricing Model. The combination of randomness in expected rates of return and proportional transactions costs is a serious blow to existing frictionless pricing models. Finally, in the last chapter I propose a two-countries two-goods general equilibrium economy with uncertainty about the fundamentals' growth rates to study the joint behavior of equity volatilities and correlation at the business cycle frequency. I assume that dividend growth rates jump from one state to other, while countries' switches are possibly correlated. The model is solved in closed-form and the analytical expressions for stock prices are reported. When calibrated to the empirical data of United States and United Kingdom, the results show that, given the existing degree of synchronization across these business cycles, the model captures quite well the historical patterns of stock return volatilities. Moreover, I can explain the time behavior of the correlation, but exclusively under the assumption of a global business cycle.

Stochastic variability of output levels in a pulp mill

Quite often, in the construction of a pulp mill involves establishing the size of tanks which will accommodate the material from the various processes in which case estimating the right tank size a priori would be vital. Hence, simulation of the whole production process would be worthwhile. Therefore, there is need to develop mathematical models that would mimic the behavior of the output from the various production units of the pulp mill to work as simulators. Markov chain models, Autoregressive moving average (ARMA) model, Mean reversion models with ensemble interaction together with Markov regime switching models are proposed for that purpose.

Korkokäyrän mallintaminen: tarkastelussa Cox-Ingersoll-Ross -malli

Korot ovat erittäin tärkeässä osassa kaikessa taloudellisessa toiminnassa ja tästä syystä niiden kehitystä seurataan mielenkiinnolla. Yksi keino korkojen kehityksen tutkimiseen on rahoitusmarkkinoilla havaittavan korkokäyrän tarkastelu. Tämän tutkielman tarkoituksena on tarkastella Cox-Ingersoll-Ross-mallin soveltuvuutta korkokäyrän empiriseen mallintamiseen. Tässä tutkielmassa Cox-Ingersoll-Ross-malli estimoidaan pienimmän neliösumman – ja suurimman uskottavuuden –menetelmillä. Tutkimuksen datana käytetään 3 kuukauden euribor-korkojen ja Saksan valtion 3 kuukauden mittaisen joukkolainan päivätason tuottoja kolmelta eri vuoden mittaiselta periodilta. Mallin avulla estimoituja korkokäyriä verrataan samojen periodien lopussa rahoitusmarkkinoilla realisoituneisiin korkokäyriin. Estimoinnin tulosten perusteella Cox-Ingersoll- Ross-malli ei sovi varauksitta korkokäyrän mallintamiseen. Pienimmän neliösumman –menetelmän diagnostisista tarkastuksista käy ilmi, että menetelmä ei ole sopiva mallin estimoimiseen. Suurimman uskottavuuden –estimoinnin avulla estimoidut korkokäyrät eroavat kaikissa paitsi yhdessä tapauksessa melko selvästi realisoituneista korkokäyristä. Tutkielman tuloksissa on selviä yhtymäkohtia aiempien empiristen tutkimusten tuloksiin. Varsinkin mallin odotusarvohakuisuutta (mean reversion) kuvaavan parametrin estimoinnissa ilmenee epävarmuutta, mikä vaikuttaa koko mallin toimintaan. Sama tulos ilmenee myös aiemmista tutkimuksista, osassa jopa kyseenalaistetaan koko ilmiön olemassaolo. Tutkielman tuloksista voidaan päätellä, että yhden muuttujan Cox-Ingersoll-Ross-malli ei varauksitta sovellu korkokäyrän empiriseen mallintamiseen. Todennäköisiä syitä tähän ovat mallin tekemät epärealistiset taustaoletukset sekä se, että tarkasteluperiodien aikana Eurooppa kärsi velkakriisistä, mikä kevensi Euroopan keskuspankin rahapolitiikkaa ja alensi korkotasoa. Tämä seikka vaikuttaa eri periodien tulosten vertailukelpoisuuteen. Tutkielman johtopäätöksenä on, että yhden muuttujan mallien sijaan korkokäyrän mallintamisessa tulisi keskittyä 3 muuttujan malleihin. Tällöin jokaiselle korkokäyrän elementille: taso, kulmakerroin ja konveksisuus saataisiin oma muuttujansa. Tämä helpottaisi myös korkokäyrän volatiliteetin mallintamisessa, mikä osoittautuu ongelmalliseksi vain yhtä muuttujaa käytettäessä.

TAKING ADVANTAGE OF THE LOCAL ADVANTAGE? - Investment value of the analyst local advantage in the Finnish stock market in 2006–2014

An investor can either conduct independent analysis or rely on the analyses of others. Stock analysts provide markets with expectations regarding particular securities. However, analysts have different capabilities and resources, of which investors are seldom cognizant. The local advantage refers to the advantage stemming from cultural or geographical proximity to securities analyzed. The research has confirmed that local agents are generally more accurate or produce excess returns. This thesis tests the investment value of the local advantage regarding Finnish stocks via target price data. The empirical section investigates the local advantage from several aspects. It is discovered that local analysts were more focused on certain sectors generally located close to consumer markets. Market reactions to target price revisions were generally insignificant with the exception to local positive target prices. Both local and foreign target prices were overly optimistic and exhibited signs of herding. Neither group could be identified as a leader or follower of new information. Additionally, foreign price change expectations were more in line with the quantitative models and ideas such as beta or return mean reversion. The locals were more accurate than foreign analysts in 5 out of 9 sectors and vice versa in one. These sectors were somewhat in line with coverage decisions and buttressed the idea of local advantage stemming from proximity to markets, not to headquarters. The accuracy advantage was dependent on sample years and on the measure used. Local analysts ranked magnitudes of price changes more accurately in optimistic and foreign analysts in pessimistic target prices. Directional accuracy of both groups was under 50% and target prices held no linear predictive power. Investment value of target prices were tested by forming mean-variance efficient portfolios. Parallel to differing accuracies in the levels of expectations foreign portfolio performed better when short sales were allowed and local better when disallowed. Both local and non-local portfolios performed worse than a passive index fund, albeit not statistically significantly. This was in line with previously reported low overall accuracy and different accuracy profiles. Refraining from estimating individual stock returns altogether produced statistically significantly higher Sharpe ratios compared to local or foreign portfolios. The proposed method of testing the investment value of target prices of different groups suffered from some inconsistencies. Nevertheless, these results are of interest to investors seeking the advice of security analysts.

TAKING ADVANTAGE OF THE LOCAL ADVANTAGE? - Investment value of the analyst local advantage in the Finnish stock market in 2006–2014

An investor can either conduct independent analysis or rely on the analyses of others. Stock analysts provide markets with expectations regarding particular securities. However, analysts have different capabilities and resources, of which investors are seldom cognizant. The local advantage refers to the advantage stemming from cultural or geographical proximity to securities analyzed. The research has confirmed that local agents are generally more accurate or produce excess returns. This thesis tests the investment value of the local advantage regarding Finnish stocks via target price data. The empirical section investigates the local advantage from several aspects. It is discovered that local analysts were more focused on certain sectors generally located close to consumer markets. Market reactions to target price revisions were generally insignificant with the exception to local positive target prices. Both local and foreign target prices were overly optimistic and exhibited signs of herding. Neither group could be identified as a leader or follower of new information. Additionally, foreign price change expectations were more in line with the quantitative models and ideas such as beta or return mean reversion. The locals were more accurate than foreign analysts in 5 out of 9 sectors and vice versa in one. These sectors were somewhat in line with coverage decisions and buttressed the idea of local advantage stemming from proximity to markets, not to headquarters. The accuracy advantage was dependent on sample years and on the measure used. Local analysts ranked magnitudes of price changes more accurately in optimistic and foreign analysts in pessimistic target prices. Directional accuracy of both groups was under 50% and target prices held no linear predictive power. Investment value of target prices were tested by forming mean-variance efficient portfolios. Parallel to differing accuracies in the levels of expectations foreign portfolio performed better when short sales were allowed and local better when disallowed. Both local and non-local portfolios performed worse than a passive index fund, albeit not statistically significantly. This was in line with previously reported low overall accuracy and different accuracy profiles. Refraining from estimating individual stock returns altogether produced statistically significantly higher Sharpe ratios compared to local or foreign portfolios. The proposed method of testing the investment value of target prices of different groups suffered from some inconsistencies. Nevertheless, these results are of interest to investors seeking the advice of security analysts.

Modelación estocástica y trading algorítmico del spread entre acciones mediante procesos de reversión a la media

Las estrategias de inversión pairs trading se basan en desviaciones del precio entre pares de acciones correlacionadas y han sido ampliamente implementadas por fondos de inversión tomando posiciones largas y cortas en las acciones seleccionadas cuando surgen divergencias y obteniendo utilidad cerrando la posición al converger. Se describe un modelo de reversión a la media para analizar la dinámica que sigue el diferencial del precio entre acciones ordinarias y preferenciales de una misma empresa en el mismo mercado. La media de convergencia en el largo plazo es obtenida con un filtro de media móvil, posteriormente, los parámetros del modelo de reversión a la media se estiman mediante un filtro de Kalman bajo una formulación de estado espacio sobre las series históricas. Se realiza un backtesting a la estrategia de pairs trading algorítmico sobre el modelo propuesto indicando potenciales utilidades en mercados financieros que se observan por fuera del equilibrio. Aplicaciones de los resultados podrían mostrar oportunidades para mejorar el rendimiento de portafolios, corregir errores de valoración y sobrellevar mejor periodos de bajos retornos.

Output convergence in Mercosur: multivariate time series evidence

The aim of this paper is to provide evidence on output convergence among the Mercosur countries and associates, using multivariate time-series tests. The methodology is based on a combination of tests and estimation procedures, both univariate and multivariate, applied to the differences in per capita real income. We use the definitions of time-series convergence proposed by Bernard & Durlauf and apply unit root and tests proposed by Abuaf & Jorion and Taylor & Sarno. In this same multivariate context, the Flôres, Preumont & Szafarz and Breuer, MbNown & Wallace tests, which allow for the existence of correlations across the series without imposing a common speed of mean reversion, identify the countries that convergence. Concerning the empirical results, there is evidence of long-run convergence or, at least, catching up, for the smaller countries, Bolivia, Paraguay, Peru and Uruguay, towards Brazil and, to some extent, Argentina. In contrast, the evidence on convergence for the larger countries is weaker, as they have followed different (or rather opposing) macroeconomic policy strategies. Thus the future of the whole area will critically depend on the ability of Brazil, Argentina and Chile to find some scope for more cooperative policy actions.

A new perspective on the PPP hypothesis

This paper the stastistical properties of the real exchange rates of G-5 countries for the Bretton-Woods peiod, and draw implications on the purchasing power parity (PPP) hypothesis. In contrast to most previous studies that consider only unit root and stationary process to describe the real exchange tae, this paper also considers two in-between processes, the locally persistent process ans the fractionally integrated process, to complement past studies. Seeking to be consistent with tha ample evidence of near unit in the real exchange rate movements very well. This finding implies that: 1) the real exchange movement is more persistent than the stationary case but less persistent than the unit root case; 2) the real exchange rate is non-stationary but the PPP reversion occurs and the PPP holds in the long run; 3) the real exchange rate does not exhibit the secular dependence of the fractional integration; 4) the real exchange rate evolves over time in a way that there is persistence over a range of time, but the effect of shocks will eventually disappear over time horizon longer than order O (nd), that is, at finite time horizon; 5) shocks dissipation is fasters than predicted by the fractional integracion, and the total sum of the effects of a unit innovation is finite, implying that a full PPP reversion occurs at finite horizons. These results may explain why pasrt empirical estudies could not provide a clear- conclusion on the real exchange rate processes and the PPP hypothesis.

Aplicando estratégias simultâneas de momento e valor no mercado brasileiro

A teoria de Finanças Comportamentais surge como uma nova abordagem ao mercado financeiro, argumentando que alguns eventos podem ser mais bem explicados se as restrições da racionalidade do investidor são relaxadas. Conceitos de psicologia e limites à arbitragem são usados para modelar as ineficiências, criando a idéia de ser possível ganhar sistematicamente do mercado. Este trabalho propõe um novo modelo, simplista na sua implementação, para aproveitar os retornos anormais advindos de estratégias de momentum e reversão à média simultaneamente. A idéia de um efeito momentum de longo prazo mais forte que o de curto prazo é introduzida, mas os resultados empíricos mostram que a dinâmica do mercado brasileiro rejeita este conceito. O modelo falha em conseguir retornos positivos e livres de risco.

Gestão estratégica de riscos de um ativo de produção de petróleo: uma abordagem quantitativa

O objetivo dessa dissertação é estabelecer um modelo quantitativo de gestão de riscos estratégicos de um ativo de produção de petróleo, notadamente o valor em risco do seu fluxo de caixa e de sua rentabilidade. Para tanto, foi utilizado um modelo de fluxo de caixa onde a receita operacional foi definida como variável estocástica. A receita operacional foi estimada a partir de uma função de perdas que descreve o volume de produção de petróleo, e de uma trajetória de preços definida por um modelo geométrico browniano sem reversão a média e com volatilidade descrita por um processo GARCH. Os resultados obtidos demonstram que o modelo proposto é capaz de fornecer informações importantes para a gestão de riscos de ativos de produção de petróleo ao passo que permite a quantificação de diferentes fatores de risco que afetam a rentabilidade das operações. Por fim, o modelo aqui proposto pode ser estendido para a avaliação do risco financeiro e operacional de um conjunto de ativos de petróleo, considerando sua estrutura de dependência e a existência de restrições de recursos financeiros, físicos e humanos.

Uma nova estratégia de negociação em pares

Uma das principais vantagens das estratégias de negociação em pares está relacionada à baixa correlação com os retornos do mercado. Ao tomar posições compradas e vendidas, estas estratégias são capazes de controlar a magnitude do beta de mercado, mantendo-se praticamente zero ou estatísticamente não significativas. A idéia consiste na realização de arbitragem estatística, aproveitando os desvios de preços de equilíbrio de longo prazo. Como tal, elas envolvem modelos de correção de equilíbrio para os pares de retornos dos ativos. Nós mostramos como construir uma estratégia de negociação de pares que é beneficiada não só pela relação de equilíbrio de longo prazo entre os pares de preços dos ativos da carteira, mas também pela velocidade com que os preços ajustam os desvios para o equilíbrio. Até então, a grande maioria das estratégias envolvendo negociação em pares se baseavam na hipótese de que a obtenção de retornos positivos estaria relacionada à reversão à média caracterizada pela relação de cointegração dos pares, mas ignorava a possibilidade de seleção dos pares testando a velocidade de ajustamento do Vetor de Correção de Erros desta relação. Os resutados deste trabalho indicaram baixos níveis de correlação com o mercado, neutralidade das estratégias, associados a retornos financeiros líquidos e Índice de Sharpe anualizados de 15,05% e 1,96 respectivamente.