Three essays on banks trading activities

With a fair share of the blame for the subprime crisis pointing to banks' extensive involvement in trading, this thesis examines three closely related issues. The first essay shows that regulatory capital arbitrage, insolvency risk, and non-interest income are all important motivations for banks to become involved in trading. The second essay support the widely held perception that trading activities such as off-balance sheet derivatives, securitization, and assets sales all are making banks more opaque. With banks' business model changing from ''originate and hold'' to ''originate, repackage, and sell'', the last essay show that trading channel exist and it has weakened the effectiveness of monetary policy transmission through banks' capital and lending channel.

Ecosystem management along ephemeral rivers: Trading off socio-economic water supply and vegetation conservation under flood regime uncertainty

In ecosystems driven by water availability, plant community dynamics depend on complex interactions between vegetation, hydrology, and human water resources use. Along ephemeral rivers—where water availability is erratic—vegetation and people are particularly vulnerable to changes in each other's water use. Sensible management requires that water supply be maintained for people, while preserving ecosystem health. Meeting such requirements is challenging because of the unpredictable water availability. We applied information gap decision theory to an ecohydrological system model of the Kuiseb River environment in Namibia. Our aim was to identify the robustness of ecosystem and water management strategies to uncertainties in future flood regimes along ephemeral rivers. We evaluated the trade-offs between alternative performance criteria and their robustness to uncertainty to account for both (i) human demands for water supply and (ii) reducing the risk of species extinction caused by water mining. Increasing uncertainty of flood regime parameters reduced the performance under both objectives. Remarkably, the ecological objective (species coexistence) was more sensitive to uncertainty than the water supply objective. However, within each objective, the relative performance of different management strategies was insensitive to uncertainty. The ‘best’ management strategy was one that is tuned to the competitive species interactions in the Kuiseb environment. It regulates the biomass of the strongest competitor and, thus, at the same time decreases transpiration, thereby increasing groundwater storage and reducing pressure on less dominant species. This robust mutually acceptable strategy enables species persistence without markedly reducing the water supply for humans. This study emphasises the utility of ecohydrological models for resource management of water-controlled ecosystems. Although trade-offs were identified between alternative performance criteria and their robustness to uncertain future flood regimes, management strategies were identified that help to secure an ecologically sustainable water supply.

Emissions Trading and WTO Law: A Global Analysis

Emissions trading schemes have been introduced throughout the world in order to achieve an environmental end. In the pursuit of reducing greenhouse gas emissions, these schemes will have a direct impact on the global economy. This book examines the details of emissions trading schemes through the lens of the World Trade Organization (WTO) law. Emissions trading schemes both implemented and proposed will be deconstructed to understand whether they will have a single uniform legal status within the WTO law, or indeed whether the legal status of the units of trade will differ on a case-by-case basis. This book examines non-discrimination provisions and exceptions within four significant WTO ‘covered agreements’. This analysis will be undertaken with a goal to understand how emissions trading scheme measures may be labelled and treated by WTO dispute settlement bodies. Moreover, the narrative of this publication demonstrates where decisions must be made by WTO Members in relation to the legal treatment of emissions trading units and liabilities. The aim of the book is to consider the issues associated with emissions trading that arise within the existing WTO law. This monograph will consider emissions trading schemes through the lens of WTO law to establish how these schemes will be defined, where they may potentially breach the non-discrimination provisions of the law and, whether the WTO law should be amended through Member agreement in order to accommodate these schemes. The book is an adaptation of a PhD thesis, which is an analysis of one emissions trading framework – the Australian Clean Energy Package – using WTO law as the theoretical framework. The aim of the proposed monograph is to increase the scope of analysis from the Clean Energy Package to emissions trading schemes more generally. It is envisaged that to do this effectively, examples of frameworks that have been proposed and implemented by various WTO members must be used as case studies for both WTO compliance and non-compliance.

The equity and efficiency of the Australian share market with respect to director trading

Purpose – The purpose of this paper is to investigate the extent of directors breaching the reporting requirements of the Australian Stock Exchange (ASX) and the Corporations Act in Australia. Further, it seeks to assess whether directors in Australia achieve abnormal returns from trades in their own companies. Design/methodology/approach – Using an event study approach on an Australian sample, abnormal returns for a range of situations were estimated. Findings – A total of 13 (seven) per cent of own‐company directors trades do not meet the ASX (Corporations Act) requirement of reporting within five (14) business days. Directors do achieve abnormal returns through trading in shares of their own companies. Ignoring transaction costs, outsiders can achieve abnormal returns by imitating directors' trades. Analysis of returns to directors after they trade but before they announce the trade to the market shows that directors are making small but statistically significant returns that are not available to the market. Analysis of returns to directors subsequent to the ASX reporting requirement up to the day the trade is reported shows that directors are making small but statistically significant returns that should be available to the market. Research limitations/implications – Future research should investigate the linkages between late reporting by directors and disadvantages to outside shareholders and the implementation of internal policies implemented to mitigate insider trading. Practical implications – Market participants should remain vigilant regarding the potential for late/non‐reporting of directors' trades. Originality/value – Uncovering breaches of reporting regulations are particularly important given that directors tend to purchase (sell) shares when the price is low (high), thereby achieving abnormal returns.

New TPP leak reveals how we’re trading our sovereignty for cheap tariffs

WikiLeaks has published the secret investment chapter in the Trans-Pacific Partnership. Dr Matthew Rimmer, associate professor at ANU College of Law, explains its insidious implications....

Evidence of package trading in a mature multi-species ITQ market

In multi-species fisheries managed under ITQs, the existence of joint production may lead to complex catch-quota balancing issues. Previous modelling and experimental research suggest that, in such fisheries, some fishers may benefit from the ability to trade packages of fishing quotas, rather than fulfil their quota needs by simultaneously bidding on separate single-species quota markets. This note presents evidence of naturally occurring package trades in a real fishery. Based on this evidence, we suggest that further empirical and modelling research is required on the potential and limitations of package quota trading in mixed fisheries managed with ITQs. © 2014.

The Impact of Emissions Trading on the Price of Electricity in Nord Pool : Market Power and Price Determination in the Nordic Electricity Market

The objective of this thesis is to find out how dominant firms in a liberalised electricity market will react when they face an increase in the level of costs due to emissions trading, and how this will effect the price of electricity. The Nordic electricity market is chosen as the setting in which to examine the question, since recent studies on the subject suggest that interaction between electricity markets and emissions trading is very much dependent on conditions specific to each market area. There is reason to believe that imperfect competition prevails in the Nordic market, thus the issue is approached through the theory of oligopolistic competition. The generation capacity available at the market, marginal cost of electricity production and seasonal levels of demand form the data based on which the dominant firms are modelled using the Cournot model of competition. The calculations are made for two levels of demand, high and low, and with several values of demand elasticity. The producers are first modelled under no carbon costs and then by adding the cost of carbon dioxide at 20€/t to those technologies subject to carbon regulation. In all cases the situation under perfect competition is determined as a comparison point for the results of the Cournot game. The results imply that the potential for market power does exist on the Nordic market, but the possibility for exercising market power depends on the demand level. In season of high demand the dominant firms may raise the price significantly above competitive levels, and the situation is aggravated when the cost of carbon dioixide is accounted for. Under low demand leves there is no difference between perfect and imperfect competition. The results are highly dependent on the price elasticity of demand.

Information flow, trading activity and commodity futures volatility

Based on unique news data relating to gold and crude oil, we investigate how news volume and sentiment, shocks in trading activity, market depth and trader positions unrelated to information flow covary with realized volatility. Positive shocks to the rate of news arrival, and negative shocks to news sentiment exhibit the largest effects. After controlling for the level of news flow and cross-correlations, net trader positions play only a minor role. These findings are at odds with those of [Wang (2002a). The Journal of Futures Markets, 22, 427–450; Wang (2002b). The Financial Review, 37, 295–316], but are consistent with the previous literature which doesn't find a strong link between volatility and trader positions.

Embodied energy of service trading in Hong Kong

Purpose Energy is a resource of strategic importance for high density cities. International trade reshapes the urban economy and industrial structure of a city, which will indirectly affect energy use. As an international trade hub, Hong Kong relies on the import and export of services. Energy performance in the international trading of these services needs to be properly understood and assessed for Hong Kong’s urban renewal efforts. Design/methodology/approach This study evaluates Hong Kong’s embodied energy in service trades based on an input-output analysis. The three criteria used for assessment include trading areas, industry sector, and trade balance. Findings Analyzed by region, results show that Mainland China and the USA are the two largest sources of embodied energy in imports of services, while Mainland China and Japan are the two largest destinations of exports. In terms of net embodied energy transfer, Hong Kong mainly receives net energy import from Mainland China and the USA and supplies net energy export to Japan, the UK and Taiwan. Among industry sectors, Manufacturing services, Transport and Travel contribute most significantly to the embodied energy in Hong Kong’s imported services, while Transport and Travel contribute most to the energy embodied in exported services. Originality/value This study identifies the characteristics of energy consumption of service trading and establishes a feasible approach to analyze energy performance of service trade in energy-deficient Hong Kong for the first time. It provides necessary understanding and foundation for developing energy strategies in a service-based, high density urban economy.

Non-preferential trading clubs

This paper examines the welfare implications of non-discriminatory tariff reforms by a subset of countries, which we term a non-preferential trading club. We show that there exist coordinated tariff reforms, accompanied by appropriate income transfers between the member countries, that unambiguously increase the welfare of these countries while leaving the welfare of non-members unaltered. In terms of economic policy implications, our results show that there exist regional, MFN-consistent arrangements that lead to Pareto improvements in world welfare.

From trading to eCommunity management

"The increasing pressure for enterprises to join into agile business networks is changing the requirements on the enterprise computing systems. The supporting infrastructure is increasingly required to provide common facilities and societal infrastructure services to support the lifecycle of loosely-coupled, eContract-governed business networks. The required facilities include selection of those autonomously administered business services that the enterprises are prepared to provide and use, contract negotiations, and furthermore, monitoring of the contracted behaviour with potential for breach management. The essential change is in the requirement of a clear mapping between business-level concepts and the automation support for them. Our work has focused on developing B2B middleware to address the above challenges; however, the architecture is not feasible without management facilities for trust-aware decisions for entering business networks and interacting within them. This paper discusses how trust-based decisions are supported and positioned in the B2B middleware."

Modeling and Forecasting Implied Volatility: Implications for Trading, Pricing, and Risk Management

Modeling and forecasting of implied volatility (IV) is important to both practitioners and academics, especially in trading, pricing, hedging, and risk management activities, all of which require an accurate volatility. However, it has become challenging since the 1987 stock market crash, as implied volatilities (IVs) recovered from stock index options present two patterns: volatility smirk(skew) and volatility term-structure, if the two are examined at the same time, presents a rich implied volatility surface (IVS). This implies that the assumptions behind the Black-Scholes (1973) model do not hold empirically, as asset prices are mostly influenced by many underlying risk factors. This thesis, consists of four essays, is modeling and forecasting implied volatility in the presence of options markets’ empirical regularities. The first essay is modeling the dynamics IVS, it extends the Dumas, Fleming and Whaley (DFW) (1998) framework; for instance, using moneyness in the implied forward price and OTM put-call options on the FTSE100 index, a nonlinear optimization is used to estimate different models and thereby produce rich, smooth IVSs. Here, the constant-volatility model fails to explain the variations in the rich IVS. Next, it is found that three factors can explain about 69-88% of the variance in the IVS. Of this, on average, 56% is explained by the level factor, 15% by the term-structure factor, and the additional 7% by the jump-fear factor. The second essay proposes a quantile regression model for modeling contemporaneous asymmetric return-volatility relationship, which is the generalization of Hibbert et al. (2008) model. The results show strong negative asymmetric return-volatility relationship at various quantiles of IV distributions, it is monotonically increasing when moving from the median quantile to the uppermost quantile (i.e., 95%); therefore, OLS underestimates this relationship at upper quantiles. Additionally, the asymmetric relationship is more pronounced with the smirk (skew) adjusted volatility index measure in comparison to the old volatility index measure. Nonetheless, the volatility indices are ranked in terms of asymmetric volatility as follows: VIX, VSTOXX, VDAX, and VXN. The third essay examines the information content of the new-VDAX volatility index to forecast daily Value-at-Risk (VaR) estimates and compares its VaR forecasts with the forecasts of the Filtered Historical Simulation and RiskMetrics. All daily VaR models are then backtested from 1992-2009 using unconditional, independence, conditional coverage, and quadratic-score tests. It is found that the VDAX subsumes almost all information required for the volatility of daily VaR forecasts for a portfolio of the DAX30 index; implied-VaR models outperform all other VaR models. The fourth essay models the risk factors driving the swaption IVs. It is found that three factors can explain 94-97% of the variation in each of the EUR, USD, and GBP swaption IVs. There are significant linkages across factors, and bi-directional causality is at work between the factors implied by EUR and USD swaption IVs. Furthermore, the factors implied by EUR and USD IVs respond to each others’ shocks; however, surprisingly, GBP does not affect them. Second, the string market model calibration results show it can efficiently reproduce (or forecast) the volatility surface for each of the swaptions markets.

Essays on Market Microstructure: Price Discovery and Informed Trading

Market microstructure is “the study of the trading mechanisms used for financial securities” (Hasbrouck (2007)). It seeks to understand the sources of value and reasons for trade, in a setting with different types of traders, and different private and public information sets. The actual mechanisms of trade are a continually changing object of study. These include continuous markets, auctions, limit order books, dealer markets, or combinations of these operating as a hybrid market. Microstructure also has to allow for the possibility of multiple prices. At any given time an investor may be faced with a multitude of different prices, depending on whether he or she is buying or selling, the quantity he or she wishes to trade, and the required speed for the trade. The price may also depend on the relationship that the trader has with potential counterparties. In this research, I touch upon all of the above issues. I do this by studying three specific areas, all of which have both practical and policy implications. First, I study the role of information in trading and pricing securities in markets with a heterogeneous population of traders, some of whom are informed and some not, and who trade for different private or public reasons. Second, I study the price discovery of stocks in a setting where they are simultaneously traded in more than one market. Third, I make a contribution to the ongoing discussion about market design, i.e. the question of which trading systems and ways of organizing trading are most efficient. A common characteristic throughout my thesis is the use of high frequency datasets, i.e. tick data. These datasets include all trades and quotes in a given security, rather than just the daily closing prices, as in traditional asset pricing literature. This thesis consists of four separate essays. In the first essay I study price discovery for European companies cross-listed in the United States. I also study explanatory variables for differences in price discovery. In my second essay I contribute to earlier research on two issues of broad interest in market microstructure: market transparency and informed trading. I examine the effects of a change to an anonymous market at the OMX Helsinki Stock Exchange. I broaden my focus slightly in the third essay, to include releases of macroeconomic data in the United States. I analyze the effect of these releases on European cross-listed stocks. The fourth and last essay examines the uses of standard methodologies of price discovery analysis in a novel way. Specifically, I study price discovery within one market, between local and foreign traders.

The Relationship Between Liquidity, Trading Activity and Return - Studies of the Finnish and Swedish Stock Markets

Liquidity, or how easy an investment is to buy or sell, is becoming increasingly important for financial market participants. The objective of this dissertation is to contribute to the understanding of how liquidity affects financial markets. The first essays analyze the actions taken by underwriters immediately after listing to improve liquidity of IPO stock. To estimate the impact of underwriter activity on the pricing of the IPOs, the order book during the first weeks of trading in the IPO stock is studied. Evidence of stabilization and liquidity enhancing activities by underwriters is found. The second half of the dissertation is concerned with the daily trading of stocks where liquidity may be impacted by policy issues such as changes in taxes or exchange fees and by opening the access to the markets for foreign investors. The desirability of a transaction tax on securities trading is addressed. An increase in transaction tax is found to cause lower prices and higher volatility. In the last essay the objective is to determine if the liquidity of a security has an impact on the return investors require. The results support the notion that returns are negatively correlated to liquidity.

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.