An Empirical Comparison of Linear and Nonlinear Volatility Models for Nordic Stock Returns

This paper examines how volatility in financial markets can preferable be modeled. The examination investigates how good the models for the volatility, both linear and nonlinear, are in absorbing skewness and kurtosis. The examination is done on the Nordic stock markets, including Finland, Sweden, Norway and Denmark. Different linear and nonlinear models are applied, and the results indicates that a linear model can almost always be used for modeling the series under investigation, even though nonlinear models performs slightly better in some cases. These results indicate that the markets under study are exposed to asymmetric patterns only to a certain degree. Negative shocks generally have a more prominent effect on the markets, but these effects are not really strong. However, in terms of absorbing skewness and kurtosis, nonlinear models outperform linear ones.

Technology-related peso problems in stock returns

Although empirical evidence suggests the contrary, many asset pricing models assume stock returns to be symmetrically distributed. In this paper it is argued that the occurrence of negative jumps in a firm's future earnings and, consequently, in its stock price, is positively related to the level of network externalities in the firm's product market. If the ex post frequency of these negative jumps in a sample does not equal the ex ante assessed probability of occurrence, the sample is subject to a peso problem. The hypothesis is tested for by regressing the skewness coefficient of a firm’s realised stock return distribution on the firm’s R&D intensity, i.e. the ratio of the firm’s research and development expenditure to its net sales. The empirical results support the technology-related peso problem hypothesis. In samples subject to such a peso problem, the returns are biased up and the variance is biased down.

Evaluating the Predictability of the Volatility Smile Using Return Distributions

In this paper, we examine the predictability of observed volatility smiles in three major European index options markets, utilising the historical return distributions of the respective underlying assets. The analysis involves an application of the Black (1976) pricing model adjusted in accordance with the Jarrow-Rudd methodology as proposed in 1982. Thereby we adjust the expected future returns for the third and fourth central moments as these represent deviations from normality in the distributions of observed returns. Thus, they are considered one possible explanation to the existence of the smile. The obtained results indicate that the inclusion of the higher moments in the pricing model to some extent reduces the volatility smile, compared with the unadjusted Black-76 model. However, as the smile is partly a function of supply, demand, and liquidity, and as such intricate to model, this modification does not appear sufficient to fully capture the characteristics of the smile.

An Empirical Investigation of Value-at-Risk in Long and Short Trading Positions

This paper uses the Value-at-Risk approach to define the risk in both long and short trading positions. The investigation is done on some major market indices(Japanese, UK, German and US). The performance of models that takes into account skewness and fat-tails are compared to symmetric models in relation to both the specific model for estimating the variance, and the distribution of the variance estimate used as input in the VaR estimation. The results indicate that more flexible models not necessarily perform better in predicting the VaR forecast; the reason for this is most probably the complexity of these models. A general result is that different methods for estimating the variance are needed for different confidence levels of the VaR, and for the different indices. Also, different models are to be used for the left respectively the right tail of the distribution.

Risk minimization in water quality control problems of a river system

Methodologies are presented for minimization of risk in a river water quality management problem. A risk minimization model is developed to minimize the risk of low water quality along a river in the face of conflict among various stake holders. The model consists of three parts: a water quality simulation model, a risk evaluation model with uncertainty analysis and an optimization model. Sensitivity analysis, First Order Reliability Analysis (FORA) and Monte-Carlo simulations are performed to evaluate the fuzzy risk of low water quality. Fuzzy multiobjective programming is used to formulate the multiobjective model. Probabilistic Global Search Laussane (PGSL), a global search algorithm developed recently, is used for solving the resulting non-linear optimization problem. The algorithm is based on the assumption that better sets of points are more likely to be found in the neighborhood of good sets of points, therefore intensifying the search in the regions that contain good solutions. Another model is developed for risk minimization, which deals with only the moments of the generated probability density functions of the water quality indicators. Suitable skewness values of water quality indicators, which lead to low fuzzy risk are identified. Results of the models are compared with the results of a deterministic fuzzy waste load allocation model (FWLAM), when methodologies are applied to the case study of Tunga-Bhadra river system in southern India, with a steady state BOD-DO model. The fractional removal levels resulting from the risk minimization model are slightly higher, but result in a significant reduction in risk of low water quality. (c) 2005 Elsevier Ltd. All rights reserved.

Experimental Studies on Mass Distribution of Impinging Jets

Noting that practical impinging injectors are likely to have skewness, an experimental study has been made to understand the behavior of such jets using water as the simulant. In perfectly impinging jets, a high aspect ratio ellipse-like mass distribution pattern is obtained with major axis normal to the plane of two jets whereas in skewed jets the major axis turns from its normal position. A simple analysis shows that this angle of turn is a function of skewness fraction and impingement angle only and is independent of injection velocity. Experimental data from both mass distribution and photographic technique validate this prediction.

Minimization of Constraint Violation in Fuzzy Multiobjective Programming

Fuzzy multiobjective programming for a deterministic case involves maximizing the minimum goal satisfaction level among conflicting goals of different stakeholders using Max-min approach. Uncertainty due to randomness in a fuzzy multiobjective programming may be addressed by modifying the constraints using probabilistic inequality (e.g., Chebyshev’s inequality) or by addition of new constraints using statistical moments (e.g., skewness). Such modifications may result in the reduction of the optimal value of the system performance. In the present study, a methodology is developed to allow some violation in the newly added and modified constraints, and then minimizing the violation of those constraints with the objective of maximizing the minimum goal satisfaction level. Fuzzy goal programming is used to solve the multiobjective model. The proposed methodology is demonstrated with an application in the field of Waste Load Allocation (WLA) in a river system.

Particle dynamics in the channel flow of a turbulent particle-gas suspension at high Stokes number. Part 1. DNS and fluctuating force model

The fluctuating force model is developed and applied to the turbulent flow of a gas-particle suspension in a channel in the limit of high Stokes number, where the particle relaxation time is large compared to the fluid correlation time, and low particle Reynolds number where the Stokes drag law can be used to describe the interaction between the particles and fluid. In contrast to the Couette flow, the fluid velocity variances in the different directions in the channel are highly non-homogeneous, and they exhibit significant variation across the channel. First, we analyse the fluctuating particle velocity and acceleration distributions at different locations across the channel. The distributions are found to be non-Gaussian near the centre of the channel, and they exhibit significant skewness and flatness. However, acceleration distributions are closer to Gaussian at locations away from the channel centre, especially in regions where the variances of the fluid velocity fluctuations are at a maximum. The time correlations for the fluid velocity fluctuations and particle acceleration fluctuations are evaluated, and it is found that the time correlation of the particle acceleration fluctuations is close to the time correlations of the fluid velocity in a `moving Eulerian' reference, moving with the mean fluid velocity. The variances of the fluctuating force distributions in the Langevin simulations are determined from the time correlations of the fluid velocity fluctuations and the results are compared with direct numerical simulations. Quantitative agreement between the two simulations are obtained provided the particle viscous relaxation time is at least five times larger than the fluid integral time.

Robustness of early warning signals of regime shifts in time-delayed ecological models

Various ecological and other complex dynamical systems may exhibit abrupt regime shifts or critical transitions, wherein they reorganize from one stable state to another over relatively short time scales. Because of potential losses to ecosystem services, forecasting such unexpected shifts would be valuable. Using mathematical models of regime shifts, ecologists have proposed various early warning signals of imminent shifts. However, their generality and applicability to real ecosystems remain unclear because these mathematical models are considered too simplistic. Here, we investigate the robustness of recently proposed early warning signals of regime shifts in two well-studied ecological models, but with the inclusion of time-delayed processes. We find that the average variance may either increase or decrease prior to a regime shift and, thus, may not be a robust leading indicator in time-delayed ecological systems. In contrast, changing average skewness, increasing autocorrelation at short time lags, and reddening power spectra of time series of the ecological state variable all show trends consistent with those of models with no time delays. Our results provide insights into the robustness of early warning signals of regime shifts in a broader class of ecological systems.

Scaling of pressure spectrum in turbulent boundary layers

Scaling of pressure spectrum in zero-pressure-gradient turbulent boundary layers is discussed. Spatial DNS data of boundary layer at one time instant (Re-theta = 4500) are used for the analysis. It is observed that in the outer regions the pressure spectra tends towards the -7/3 law predicted by Kolmogorov's theory of small-scale turbulence. The slope in the pressure spectra varies from -1 close to the wall to a value close to -7/3 in the outer region. The streamwise velocity spectra also show a -5/3 trend in the outer region of the flow. The exercise carried out to study the amplitude modulation effect of the large scales on the smaller ones in the near-wall region reveals a strong modulation effect for the streamwise velocity, but not for the pressure fluctuations. The skewness of the pressure follows the same trend as the amplitude modulation coefficient, as is the case for the velocity. In the inner region, pressure spectra were seen to collapse better when normalized with the local Reynolds stress (-(u'v') over bar) than when scaled with the local turbulent kinetic energy (q(2) = (u'(2)) over bar + (v'(2)) over bar + (w'(2)) over bar)

A fast algorithm for speech polarity detection using long-term linear prediction

Speech polarity detection is a crucial first step in many speech processing techniques. In this paper, an algorithm is proposed that improvises the existing technique using the skewness of the voice source (VS) signal. Here, the integrated linear prediction residual (ILPR) is used as the VS estimate, which is obtained using linear prediction on long-term frames of the low-pass filtered speech signal. This excludes the unvoiced regions from analysis and also reduces the computation. Further, a modified skewness measure is proposed for decision, which also considers the magnitude of the skewness of the ILPR along with its sign. With the detection error rate (DER) as the performance metric, the algorithm is tested on 8 large databases and its performance (DER=0.20%) is found to be comparable to that of the best technique (DER=0.06%) on both clean and noisy speech. Further, the proposed method is found to be ten times faster than the best technique.

Smiling under stochastic volatility

This paper studies the behavior of the implied volatility function (smile) when the true distribution of the underlying asset is consistent with the stochastic volatility model proposed by Heston (1993). The main result of the paper is to extend previous results applicable to the smile as a whole to alternative degrees of moneyness. The conditions under which the implied volatility function changes whenever there is a change in the parameters associated with Hestons stochastic volatility model for a given degree of moneyness are given.

Statistics of Turbulence in Benthal Boundary Layers

This paper deals with turbulence behavior inbenthalboundarylayers by means of large eddy simulation (LES). The flow is modeled by moving an infinite plate in an otherwise quiescent water with an oscillatory and a steady velocity components. The oscillatory one aims to simulate wave effect on the flow. A number of large-scale turbulence databases have been established, based on which we have obtained turbulencestatisticsof the boundarylayers, such as Reynolds stress, turbulence intensity, skewness and flatness ofturbulence, and temporal and spatial scales of turbulent bursts, etc. Particular attention is paid to the dependences of those statistics on two nondimensional parameters, namely the Reynolds number and the current-wave velocity ratio defined as the steady current velocity over the oscillatory velocity amplitude. It is found that the Reynolds stress and turbulence intensity profile differently from phase to phase, and exhibit two types of distributions in an oscillatory cycle. One is monotonic occurring during the time when current and wave-induced components are in the same direction, and the other inflectional occurring during the time when current and wave-induced components are in opposite directions. Current component makes an asymmetrical time series of Reynolds stress, as well as turbulence intensity, although the mean velocity series is symmetrical as a sine/cosine function. The skewness and flatness variations suggest that the turbulence distribution is not a normal function but approaches to a normal one with the increasing of Reynolds number and the current-wave velocity ratio as well. As for turbulent bursting, the dimensionless period and the mean area of all bursts per unit bed area tend to increase with Reynolds number and current-wave velocity ratio, rather than being constant as in steady channel flows.

Mussel Community Studies [Year Three].

The communities associated with Mytilus californianus (mussel) beds from 20 geographic sites in southern California were examined. The study areas included six mainland sites - Government Point, Goleta Point, Ventura, Corona del Mar, Carlsbad, and San Diego,and two sites on opposite sides of seven offshore islands - San Miguel Island, Santa Rosa Island, Santa Cruz Island, Anacapa Island, San Nicholas Island, Santa Cruz Island and San Clemente Island. : The mussel communities from all areas contributed to the master species list which now encompasses conservatively, 610 species of animals and 141 species of algae. The most diverse collection came from Cat Rock, Anacapa Island where the mussel beds supported 174 species of invertebrates. The lowest diversity was recorded for mussel beds from Ben Weston, Santa Catalina Island which contained 46 species. In general, the island mussel beds supported a greater diversity of both animals and plants. Mussel community samples were collected from upper and lower intertidal areas occupied by the mussel beds within a locality. Community differences in both composition and abundance were associated with these collections. Overall. community similarity analysis revealed five major patterns which corresponded to characteristic species assemblages occupying the mussel beds from the various geographic areas. The patterns included: (1) clusters of localities which display a north-south geographic pattern with respect to the similarity of their respective mussel communities, (2) a separation of selected island and mainland communities because of dissimilarities in their species composition, (3) differences between mussel communities. on opposite sides of the offshore islands, (4) clusters of species whose highest abundances characterize selected localities, (5) species groups ubiquitous to all mussel beds examined. The results of the community analysis further suggest that predictions can be made delineating the probable mussel community inhabitants of areas not sampled. The species distribution patterns observed appear to correspond in part to the influence of currents and water masses which bear planktonic larvae and impinge on selected localities. The most important mussel bed features associated with community differences were quantitative and qualitative differences in the potential microhabitats. Those features associate~ with greater species diversity include the pore base of coarse fraction shell and rock debris, skewness and kurtosis of the sediment grain-size distributions and mussel bed thickness. Those features associated with lower species diversity included the quantity of tar. and rock and shell debris trapped within the mussel bed. (PDF contains 51 pages)

Real-Time Bayesian Analysis of Ground Motion Envelopes for Earthquake Early Warning

Current earthquake early warning systems usually make magnitude and location predictions and send out a warning to the users based on those predictions. We describe an algorithm that assesses the validity of the predictions in real-time. Our algorithm monitors the envelopes of horizontal and vertical acceleration, velocity, and displacement. We compare the observed envelopes with the ones predicted by Cua & Heaton's envelope ground motion prediction equations (Cua 2005). We define a "test function" as the logarithm of the ratio between observed and predicted envelopes at every second in real-time. Once the envelopes deviate beyond an acceptable threshold, we declare a misfit. Kurtosis and skewness of a time evolving test function are used to rapidly identify a misfit. Real-time kurtosis and skewness calculations are also inputs to both probabilistic (Logistic Regression and Bayesian Logistic Regression) and nonprobabilistic (Least Squares and Linear Discriminant Analysis) models that ultimately decide if there is an unacceptable level of misfit. This algorithm is designed to work at a wide range of amplitude scales. When tested with synthetic and actual seismic signals from past events, it works for both small and large events.