Stochastic modelling of financial time series with memory and multifractal scaling

Financial processes may possess long memory and their probability densities may display heavy tails. Many models have been developed to deal with this tail behaviour, which reflects the jumps in the sample paths. On the other hand, the presence of long memory, which contradicts the efficient market hypothesis, is still an issue for further debates. These difficulties present challenges with the problems of memory detection and modelling the co-presence of long memory and heavy tails. This PhD project aims to respond to these challenges. The first part aims to detect memory in a large number of financial time series on stock prices and exchange rates using their scaling properties. Since financial time series often exhibit stochastic trends, a common form of nonstationarity, strong trends in the data can lead to false detection of memory. We will take advantage of a technique known as multifractal detrended fluctuation analysis (MF-DFA) that can systematically eliminate trends of different orders. This method is based on the identification of scaling of the q-th-order moments and is a generalisation of the standard detrended fluctuation analysis (DFA) which uses only the second moment; that is, q = 2. We also consider the rescaled range R/S analysis and the periodogram method to detect memory in financial time series and compare their results with the MF-DFA. An interesting finding is that short memory is detected for stock prices of the American Stock Exchange (AMEX) and long memory is found present in the time series of two exchange rates, namely the French franc and the Deutsche mark. Electricity price series of the five states of Australia are also found to possess long memory. For these electricity price series, heavy tails are also pronounced in their probability densities. The second part of the thesis develops models to represent short-memory and longmemory financial processes as detected in Part I. These models take the form of continuous-time AR(∞) -type equations whose kernel is the Laplace transform of a finite Borel measure. By imposing appropriate conditions on this measure, short memory or long memory in the dynamics of the solution will result. A specific form of the models, which has a good MA(∞) -type representation, is presented for the short memory case. Parameter estimation of this type of models is performed via least squares, and the models are applied to the stock prices in the AMEX, which have been established in Part I to possess short memory. By selecting the kernel in the continuous-time AR(∞) -type equations to have the form of Riemann-Liouville fractional derivative, we obtain a fractional stochastic differential equation driven by Brownian motion. This type of equations is used to represent financial processes with long memory, whose dynamics is described by the fractional derivative in the equation. These models are estimated via quasi-likelihood, namely via a continuoustime version of the Gauss-Whittle method. The models are applied to the exchange rates and the electricity prices of Part I with the aim of confirming their possible long-range dependence established by MF-DFA. The third part of the thesis provides an application of the results established in Parts I and II to characterise and classify financial markets. We will pay attention to the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the NASDAQ Stock Exchange (NASDAQ) and the Toronto Stock Exchange (TSX). The parameters from MF-DFA and those of the short-memory AR(∞) -type models will be employed in this classification. We propose the Fisher discriminant algorithm to find a classifier in the two and three-dimensional spaces of data sets and then provide cross-validation to verify discriminant accuracies. This classification is useful for understanding and predicting the behaviour of different processes within the same market. The fourth part of the thesis investigates the heavy-tailed behaviour of financial processes which may also possess long memory. We consider fractional stochastic differential equations driven by stable noise to model financial processes such as electricity prices. The long memory of electricity prices is represented by a fractional derivative, while the stable noise input models their non-Gaussianity via the tails of their probability density. A method using the empirical densities and MF-DFA will be provided to estimate all the parameters of the model and simulate sample paths of the equation. The method is then applied to analyse daily spot prices for five states of Australia. Comparison with the results obtained from the R/S analysis, periodogram method and MF-DFA are provided. The results from fractional SDEs agree with those from MF-DFA, which are based on multifractal scaling, while those from the periodograms, which are based on the second order, seem to underestimate the long memory dynamics of the process. This highlights the need and usefulness of fractal methods in modelling non-Gaussian financial processes with long memory.

Personalised ontology learning and mining for web information gathering

Over the last decade, the rapid growth and adoption of the World Wide Web has further exacerbated user needs for e±cient mechanisms for information and knowledge location, selection, and retrieval. How to gather useful and meaningful information from the Web becomes challenging to users. The capture of user information needs is key to delivering users' desired information, and user pro¯les can help to capture information needs. However, e®ectively acquiring user pro¯les is di±cult. It is argued that if user background knowledge can be speci¯ed by ontolo- gies, more accurate user pro¯les can be acquired and thus information needs can be captured e®ectively. Web users implicitly possess concept models that are obtained from their experience and education, and use the concept models in information gathering. Prior to this work, much research has attempted to use ontologies to specify user background knowledge and user concept models. However, these works have a drawback in that they cannot move beyond the subsumption of super - and sub-class structure to emphasising the speci¯c se- mantic relations in a single computational model. This has also been a challenge for years in the knowledge engineering community. Thus, using ontologies to represent user concept models and to acquire user pro¯les remains an unsolved problem in personalised Web information gathering and knowledge engineering. In this thesis, an ontology learning and mining model is proposed to acquire user pro¯les for personalised Web information gathering. The proposed compu- tational model emphasises the speci¯c is-a and part-of semantic relations in one computational model. The world knowledge and users' Local Instance Reposito- ries are used to attempt to discover and specify user background knowledge. From a world knowledge base, personalised ontologies are constructed by adopting au- tomatic or semi-automatic techniques to extract user interest concepts, focusing on user information needs. A multidimensional ontology mining method, Speci- ¯city and Exhaustivity, is also introduced in this thesis for analysing the user background knowledge discovered and speci¯ed in user personalised ontologies. The ontology learning and mining model is evaluated by comparing with human- based and state-of-the-art computational models in experiments, using a large, standard data set. The experimental results are promising for evaluation. The proposed ontology learning and mining model in this thesis helps to develop a better understanding of user pro¯le acquisition, thus providing better design of personalised Web information gathering systems. The contributions are increasingly signi¯cant, given both the rapid explosion of Web information in recent years and today's accessibility to the Internet and the full text world.

Improvement to Chinese information retrieval by incorporating word segmentation and query expansion

The increasing diversity of the Internet has created a vast number of multilingual resources on the Web. A huge number of these documents are written in various languages other than English. Consequently, the demand for searching in non-English languages is growing exponentially. It is desirable that a search engine can search for information over collections of documents in other languages. This research investigates the techniques for developing high-quality Chinese information retrieval systems. A distinctive feature of Chinese text is that a Chinese document is a sequence of Chinese characters with no space or boundary between Chinese words. This feature makes Chinese information retrieval more difficult since a retrieved document which contains the query term as a sequence of Chinese characters may not be really relevant to the query since the query term (as a sequence Chinese characters) may not be a valid Chinese word in that documents. On the other hand, a document that is actually relevant may not be retrieved because it does not contain the query sequence but contains other relevant words. In this research, we propose two approaches to deal with the problems. In the first approach, we propose a hybrid Chinese information retrieval model by incorporating word-based techniques with the traditional character-based techniques. The aim of this approach is to investigate the influence of Chinese segmentation on the performance of Chinese information retrieval. Two ranking methods are proposed to rank retrieved documents based on the relevancy to the query calculated by combining character-based ranking and word-based ranking. Our experimental results show that Chinese segmentation can improve the performance of Chinese information retrieval, but the improvement is not significant if it incorporates only Chinese segmentation with the traditional character-based approach. In the second approach, we propose a novel query expansion method which applies text mining techniques in order to find the most relevant words to extend the query. Unlike most existing query expansion methods, which generally select the highly frequent indexing terms from the retrieved documents to expand the query. In our approach, we utilize text mining techniques to find patterns from the retrieved documents that highly correlate with the query term and then use the relevant words in the patterns to expand the original query. This research project develops and implements a Chinese information retrieval system for evaluating the proposed approaches. There are two stages in the experiments. The first stage is to investigate if high accuracy segmentation can make an improvement to Chinese information retrieval. In the second stage, a text mining based query expansion approach is implemented and a further experiment has been done to compare its performance with the standard Rocchio approach with the proposed text mining based query expansion method. The NTCIR5 Chinese collections are used in the experiments. The experiment results show that by incorporating the text mining based query expansion with the hybrid model, significant improvement has been achieved in both precision and recall assessments.