Dynamic Option Adjusted Spread and the Value of Mortgage Backed Securities (Draft 2)

We extend a reduced form model for pricing pass-through mortgage backed securities (MBS) and provide a novel hedging tool for investors in this market. To calculate the price of an MBS, traders use what is known as option-adjusted spread (OAS). The resulting OAS value represents the required basis points adjustment to reference curve discounting rates needed to match an observed market price. The OAS suffers from some drawbacks. For example, it remains constant until the maturity of the bond (thirty years in mortgage-backed securities), and does not incorporate interest rate volatility. We suggest instead what we call dynamic option adjusted spread (DOAS), which allows investors in the mortgage market to account for both prepayment risk and changes of the yield curve.

IInflation and Globalisation: A Dynamic Factor Model with Stochastic Volatility

National inflation rates reflect domestic and international (regional and global) influences. The relative importance of these components remains a controversial empirical issue. We extend the literature on inflation co-movement by utilising a dynamic factor model with stochastic volatility to account for shifts in the variance of inflation and endogenously determined regional groupings. We find that most of inflation variability is explained by the country specific disturbance term. Nevertheless, the contribution of the global component in explaining industrialised countries’ inflation rates has increased over time.

The Timing of Asset Trade and Optimal Policy in Dynamic Open Economies

Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual country level. If asset trade in the initial period takes place before the announcement of policy, a national policymaker can choose a policy rule which reduces the work effort of households in the policymaker’s country in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policymaker’s country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policymakers are very different between the two cases. Numerical examples confirm that asset market timing has a significant impact on the optimal policy rule.

Distributional and Poverty Consequences of Globalization: A Dynamic Comparative Analysis for Developing Countries

This study examines the impact of globalization on cross-country inequality and poverty using a panel data set for 65 developing counties, over the period 1970-2008. With separate modelling for poverty and inequality, explicit control for financial intermediation, and comparative analysis for developing countries, the study attempts to provide a deeper understanding of cross country variations in income inequality and poverty. The major findings of the study are five fold. First, a non-monotonic relationship between income distribution and the level of economic development holds in all samples of countries. Second, both openness to trade and FDI do not have a favourable effect on income distribution in developing countries. Third, high financial liberalization exerts a negative and significant influence on income distribution in developing countries. Fourth, inflation seems to distort income distribution in all sets of countries. Finally, the government emerges as a major player in impacting income distribution in developing countries.

Forecasting Inflation Using Dynamic Model Averaging

We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.

Forecasting Inflation Using Dynamic Model Averaging

We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.

Alliance evolutions over the course of short-term dynamic psychotherapy: A case study

Background: Alliance evolutions, i.e. ruptures and resolutions over the course of psychotherapy, have been shown to be important descriptive features in different forms of psychotherapy, and in particular in psychodynamic psychotherapy. This case study of a client presenting elements of adjustment disorder undergoing short-term dynamic psychotherapy is drawn from a systematic naturalistic study and aims at illustrating, on a session-by-session-level, the processes of alliance ruptures and resolutions, by comparing both the client's and the therapist's perspectives. Method: Two episodes of alliance evolution were more fully studied, in relation to the evolution of transference, as well as the client's defensive functioning and core conflictual theme. These concepts were measured by means of valid, reliable observer-rater methods, based on session transcripts: the Defense Mechanisms Rating Scales (DMRS) for defensive functioning and the Core Conflictual Relationship Theme (CCRT) for the conflicts. Alliance was measured after each session using the Helping Alliance questionnaire (HAq-II). Results: The results indicated that these episodes of alliance rupture and resolutions may be understood as key moments of the whole therapeutic process reflecting the client's main relationship stakes. Illustrations are provided based on the client's in-session processes and related to the alliance development over the course of the entire therapy.

Co-movements in Real Effective Exchange Rates: Evidence from the Dynamic Hierarchical Factor Model

We analyze and quantify co-movements in real effective exchange rates while considering the regional location of countries. More specifically, using the dynamic hierarchical factor model (Moench et al. (2011)), we decompose exchange rate movements into several latent components; worldwide and two regional factors as well as country-specific elements. Then, we provide evidence that the worldwide common factor is closely related to monetary policies in large advanced countries while regional common factors tend to be captured by those in the rest of the countries in a region. However, a substantial proportion of the variation in the real exchange rates is reported to be country-specific; even in Europe country-specific movements exceed worldwide and regional common factors.

A Simple Characterization of Dynamic Completeness in Continuous Time

This paper investigates dynamic completeness of financial markets in which the underlying risk process is a multi-dimensional Brownian motion and the risky securities dividends geometric Brownian motions. A sufficient condition, that the instantaneous dispersion matrix of the relative dividends is non-degenerate, was established recently in the literature for single-commodity, pure-exchange economies with many heterogenous agents, under the assumption that the intermediate flows of all dividends, utilities, and endowments are analytic functions. For the current setting, a different mathematical argument in which analyticity is not needed shows that a slightly weaker condition suffices for general pricing kernels. That is, dynamic completeness obtains irrespectively of preferences, endowments, and other structural elements (such as whether or not the budget constraints include only pure exchange, whether or not the time horizon is finite with lump-sum dividends available on the terminal date, etc.)

Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas

We study the asymmetric and dynamic dependence between financial assets and demonstrate, from the perspective of risk management, the economic significance of dynamic copula models. First, we construct stock and currency portfolios sorted on different characteristics (ex ante beta, coskewness, cokurtosis and order flows), and find substantial evidence of dynamic evolution between the high beta (respectively, coskewness, cokurtosis and order flow) portfolios and the low beta (coskewness, cokurtosis and order flow) portfolios. Second, using three different dependence measures, we show the presence of asymmetric dependence between these characteristic-sorted portfolios. Third, we use a dynamic copula framework based on Creal et al. (2013) and Patton (2012) to forecast the portfolio Value-at-Risk of long-short (high minus low) equity and FX portfolios. We use several widely used univariate and multivariate VaR models for the purpose of comparison. Backtesting our methodology, we find that the asymmetric dynamic copula models provide more accurate forecasts, in general, and, in particular, perform much better during the recent financial crises, indicating the economic significance of incorporating dynamic and asymmetric dependence in risk management.

Dynamic Relational Contracts under Complete Information

This paper considers a long-term relationship between two agents who both undertake a costly action or investment that together produces a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. Two cases are considered: (i) where agents are risk neutral and are subject to limited liability constraints and (ii) where agents are risk averse, have quasi-linear preferences in consumption and actions but where limited liability constraints do not bind. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. In the risk-neutral case, there may be an initial phase in which one agent overinvests and the other underinvests. However, both actions and surplus converge monotonically to a stationary state in which there is no overinvestment and surplus is at its maximum subject to the constraints. In the risk-averse case, there is no overinvestment. For this case, we establish that dynamics may or may not be monotonic depending on whether or not it is possible to sustain a first-best allocation. If the first-best allocation is not sustainable, then there is a trade-off between risk sharing and surplus maximization. In general, surplus will not be at its constrained maximum even in the long run.

Modeling Dependence Structure and Forecasting Market Risk with Dynamic Asymmetric Copula

We investigate the dynamic and asymmetric dependence structure between equity portfolios from the US and UK. We demonstrate the statistical significance of dynamic asymmetric copula models in modelling and forecasting market risk. First, we construct “high-minus-low" equity portfolios sorted on beta, coskewness, and cokurtosis. We find substantial evidence of dynamic and asymmetric dependence between characteristic-sorted portfolios. Second, we consider a dynamic asymmetric copula model by combining the generalized hyperbolic skewed t copula with the generalized autoregressive score (GAS) model to capture both the multivariate non-normality and the dynamic and asymmetric dependence between equity portfolios. We demonstrate its usefulness by evaluating the forecasting performance of Value-at-Risk and Expected Shortfall for the high-minus-low portfolios. From back-testing, e find consistent and robust evidence that our dynamic asymmetric copula model provides the most accurate forecasts, indicating the importance of incorporating the dynamic and asymmetric dependence structure in risk management.

IL28B polymorphism is significantly correlated with ifn anti-viral effectiveness already on first day of pegylated interferon-alpha and ribavirin therapy of chronic HCV infection

Background and Aims: Recently, single nucleotide polymorphisms (SNPs) in IL28B were shown to correlate with response to pegylated interferon-a (IFN) and ribavirin therapy of chronic HCV infection. However, the cause for the SNPs effect on therapy response and its application for direct anti-viral (DAV) treatment are not clear. Here, we analyze early HCV kinetics as function of IL28B SNPs to determine its specific effect on viral dynamics. Methods: IL28B SNPs rs8099917, rs12979860 and rs12980275 were genotyped in 252 chronically HCV infected Caucasian naïve patients (67% HCV genotype 1, 28% genotype 2-3) receiving peginterferonalfa- 2a (180 mg/qw) plus ribavirin (1000-1200 mg/qd) in the DITTO study. HCV-RNA was measured (LD = 50 IU/ml) frequently during first 28 days. Results: RVR was achieved in 33% of genotype 1 patients with genotype CC at rs12979860 versus 12-16% for genotypes TT and CT (P < 0.03). Significant (P < 0.001) difference in viral decline was observed already at day 1 (see Figure). First phase decline was significantly (P < 0.001) larger in patients with genotype CC (2.0 log) than for TT and CT genotypes (0.6 and 0.8), indicating IFN anti-viral effectiveness in blocking virion production of 99% versus 75-84%. There was no significant association between second phase slope and rs12979860 genotype in patients with a first phase decline larger than 1 log. HCV kinetics as function of IL28b SNP. The same trend (not shown) was observed for HCV genotype 2-3 patients with different SNP genotype distribution that may indicate differential selection pressure as function of HCV genotype. Similar results were observed for SNPs rs8099917 and rs12980275, with a strong linkage disequilibrium among the 3 loci allowing to define the composite haplotype best associated with IFN effectiveness. Conclusions: IFN effectiveness in blocking virion production/ release is strongly affected by IL28B SNPs, but not other viral dynamic properties such as infected cell loss rate. Thus, IFN based therapy, as standard-of-care or in combination with DAV, should consider IL28B SNPs for prediction and personalized treatment, while response to pure DAV treatment may be less affected by IL28B SNPs. Additional analyses are undergoing to pinpoint the SNP effect on IFN anti-viral effectiveness.

Fear assessment in pigs exposed to a novel object test

The experiment aimed to study approach and locomotive behaviour as indicators of fear in a novel object test carried out in pigs. Thirty post-weaning (30 kg) and 30 finishing (90 kg) pigs were exposed to visual, auditory and olfactory novel stimuli during 2 different experiments. The facilities consisted of a test pen in which a trough was located. The trough contained chopped apples. Once the animals were trained to enter the test pen individually they were subjected to 3 different fear stimuli. These stimuli were applied in the test pen and next to the trough. The variables studied were feeding behaviour, approach behaviour (the distance and position of the animal with respect to the trough) and locomotive behaviour (general activity, reluctance to move, turning back and retreat attempts). Two groups were studied: saline and midazolam treated group. Twenty minutes before the start of the sessions, 15 post-weaning and finishing pigs received an intramuscular injection of 0.20 and 0.15 mg/kg, respectively, midazolam (Dormicum1). The saline pigs (15 animals per group) were injected with saline. The administration of midazolam increased the feeding behaviour and approaching behaviour, and reduced the locomotive behaviour. In front of the visual and olfactory stimuli post-weaning pigs showed a higher general activity than finishing pigs, but the contrary was found when the auditory stimulus was applied. The olfactory stimulus was more related to the turning back behaviour, whereas the visual stimulus was more related to retreat attempts. Although it could be concluded that reluctant to move was the most common response to the different fear stimuli applied in our study regardless of the age of animals, the combination of reluctant to move and turning back would be a good criterion to assess fear in domestic pigs. The use of midazolam as anxiolytic for studies of fear in commercial conditions in pigs is recommended.