Essays on the Modeling and Prediction of Volatility and Higher Moments of Stock Returns (summary section only)

One of the most fundamental and widely accepted ideas in finance is that investors are compensated through higher returns for taking on non-diversifiable risk. Hence the quantification, modeling and prediction of risk have been, and still are one of the most prolific research areas in financial economics. It was recognized early on that there are predictable patterns in the variance of speculative prices. Later research has shown that there may also be systematic variation in the skewness and kurtosis of financial returns. Lacking in the literature so far, is an out-of-sample forecast evaluation of the potential benefits of these new more complicated models with time-varying higher moments. Such an evaluation is the topic of this dissertation. Essay 1 investigates the forecast performance of the GARCH (1,1) model when estimated with 9 different error distributions on Standard and Poor’s 500 Index Future returns. By utilizing the theory of realized variance to construct an appropriate ex post measure of variance from intra-day data it is shown that allowing for a leptokurtic error distribution leads to significant improvements in variance forecasts compared to using the normal distribution. This result holds for daily, weekly as well as monthly forecast horizons. It is also found that allowing for skewness and time variation in the higher moments of the distribution does not further improve forecasts. In Essay 2, by using 20 years of daily Standard and Poor 500 index returns, it is found that density forecasts are much improved by allowing for constant excess kurtosis but not improved by allowing for skewness. By allowing the kurtosis and skewness to be time varying the density forecasts are not further improved but on the contrary made slightly worse. In Essay 3 a new model incorporating conditional variance, skewness and kurtosis based on the Normal Inverse Gaussian (NIG) distribution is proposed. The new model and two previously used NIG models are evaluated by their Value at Risk (VaR) forecasts on a long series of daily Standard and Poor’s 500 returns. The results show that only the new model produces satisfactory VaR forecasts for both 1% and 5% VaR Taken together the results of the thesis show that kurtosis appears not to exhibit predictable time variation, whereas there is found some predictability in the skewness. However, the dynamic properties of the skewness are not completely captured by any of the models.

Three Essays on the Volatility of Finnish Stock Returns (summary section only)

First, in Essay 1, we test whether it is possible to forecast Finnish Options Index return volatility by examining the out-of-sample predictive ability of several common volatility models with alternative well-known methods; and find additional evidence for the predictability of volatility and for the superiority of the more complicated models over the simpler ones. Secondly, in Essay 2, the aggregated volatility of stocks listed on the Helsinki Stock Exchange is decomposed into a market, industry-and firm-level component, and it is found that firm-level (i.e., idiosyncratic) volatility has increased in time, is more substantial than the two former, predicts GDP growth, moves countercyclically and as well as the other components is persistent. Thirdly, in Essay 3, we are among the first in the literature to seek for firm-specific determinants of idiosyncratic volatility in a multivariate setting, and find for the cross-section of stocks listed on the Helsinki Stock Exchange that industrial focus, trading volume, and block ownership, are positively associated with idiosyncratic volatility estimates––obtained from both the CAPM and the Fama and French three-factor model with local and international benchmark portfolios––whereas a negative relation holds between firm age as well as size and idiosyncratic volatility.

Examining and Modeling the Dynamics of the Volatility Surface

The objective of this paper is to investigate and model the characteristics of the prevailing volatility smiles and surfaces on the DAX- and ESX-index options markets. Continuing on the trend of Implied Volatility Functions, the Standardized Log-Moneyness model is introduced and fitted to historical data. The model replaces the constant volatility parameter of the Black & Scholes pricing model with a matrix of volatilities with respect to moneyness and maturity and is tested out-of-sample. Considering the dynamics, the results show support for the hypotheses put forward in this study, implying that the smile increases in magnitude when maturity and ATM volatility decreases and that there is a negative/positive correlation between a change in the underlying asset/time to maturity and implied ATM volatility. Further, the Standardized Log-Moneyness model indicates an improvement to pricing accuracy compared to previous Implied Volatility Function models, however indicating that the parameters of the models are to be re-estimated continuously for the models to fully capture the changing dynamics of the volatility smiles.

Pre-harvest measurement of pine stands for sawing production planning.

To enhance the utilization of the wood, the sawmills are forced to place more emphasis on planning to master the whole production chain from the forest to the end product. One significant obstacle to integrating the forest-sawmill-market production chain is the lack of appropriate information about forest stands. Since the wood procurement point of view in forest planning systems has been almost totally disregarded there has been a great need to develop an easy and efficient pre-harvest measurement method, allowing separate measurement of stands prior to harvesting. The main purpose of this study was to develop a measurement method for pine stands which forest managers could use in describing the properties of the standing trees for sawing production planning. Study materials were collected from ten Scots pine stands (Pinus sylvestris) located in North Häme and South Pohjanmaa, in southern Finland. The data comprise test sawing data on 314 pine stems, dbh and height measures of all trees and measures of the quality parameters of pine sawlog stems in all ten study stands as well as the locations of all trees in six stands. The study was divided into four sub-studies which deal with pine quality prediction, construction of diameter and dead branch height distributions, sampling designs and applying height and crown height models. The final proposal for the pre-harvest measurement method is a synthesis of the individual sub-studies. Quality analysis resulted in choosing dbh, distance from stump height to the first dead branch (dead branch height), crown height and tree height as the most appropriate quality characteristics of Scots pine. Dbh and dead branch height are measured from each pine sample tree while height and crown height are derived from dbh measures by aid of mixed height and crown height models. Pine and spruce diameter distribution as well as dead branch height distribution are most effectively predicted by the kernel function. Roughly 25 sample trees seems to be appropriate in pure pine stands. In mixed stands the number of sample trees needs to be increased in proportion to the intensity of pines in order to attain the same level of accuracy.

A modell of socially optimal hydro reservoir usage - yelding socially optimal outcomes in nordic electricity markets

An extensive electricity transmission network facilitates electricity trading between Finland, Sweden, Norway and Denmark. Currently most of the area's power generation is traded at NordPool, where the trading volumes have steadily increased since the early 1990's, when the exchange was founded. The Nordic electricity is expected to follow the current trend and further integrate with the other European electricity markets. Hydro power is the source for roughly a half of the supply in the Nordic electricity market and most of the hydro is generated in Norway. The dominating role of hydro power distinguishes the Nordic electricity market from most of the other market places. Production of hydro power varies mainly due to hydro reservoirs and demand for electricity. Hydro reservoirs are affected by water inflows that differ each year. The hydro reservoirs explain remarkably the behaviour of the Nordic electricity markets. Therefore among others, Kauppi and Liski (2008) have developed a model that analyzes the behaviour of the markets using hydro reservoirs as explanatory factors. Their model includes, for example, welfare loss due to socially suboptimal hydro reservoir usage, socially optimal electricity price, hydro reservoir storage and thermal reservoir storage; that are referred as outcomes. However, the model does not explain the real market condition but rather an ideal situation. In the model the market is controlled by one agent, i.e. one agent controls all the power generation reserves; it is referred to as a socially optimal strategy. Article by Kauppi and Liski (2008) includes an assumption where an individual agent has a certain fraction of market power, e.g. 20 % or 30 %. In order to maintain the focus of this thesis, this part of their paper is omitted. The goal of this thesis is two-fold. Firstly we expand the results from the socially optimal strategy for years 2006-08, as the earlier study finishes in 2005. The second objective is to improve on the methods from the previous study. This thesis results several outcomes (SPOT-price and welfare loss, etc.) due to socially optimal actions. Welfare loss is interesting as it describes the inefficiency of the market. SPOT-price is an important output for the market participants as it often has an effect on end users' electricity bills. Another function is to modify and try to improve the model by means of using more accurate input data, e.g. by considering pollution trade rights effect on input data. After modifications to the model, new welfare losses are calculated and compared with the same results before the modifications. The hydro reservoir has the higher explanatory significance in the model followed by thermal power. In Nordic markets, thermal power reserves are mostly nuclear power and other thermal sources (coal, natural gas, oil, peat). It can be argued that hydro and thermal reservoirs determine electricity supply. Roughly speaking, the model takes into account electricity demand and supply, and several parameters related to them (water inflow, oil price, etc.), yielding finally the socially optimal outcomes. The author of this thesis is not aware of any similar model being tested before. There have been some other studies that are close to the Kauppi and Liski (2008) model, but those have a somewhat different focus. For example, a specific feature in the model is the focus on long-run capacity usage that differs from the previous studies on short-run market power. The closest study to the model is from California's wholesale electricity markets that, however, uses different methodology. Work is constructed as follows.

Analysis of Compressibility of Sensitive Soils

Sensitive soils, in general, are prone to mechanical disturbances while sampling, handling, and testing. This necessitates the prediction of true field behavior. The compressibility response of such soils is typical of having three zones, mechanistically explained as nonparticulate, transitional, and particulate. Such zoning has enabled the development of a simple method to predict the field compressibility response of the sample. The field compression curve with sigmact act as the most probable yield stress is considered to reflect 0% disturbance. By a comparison of experimentally determined sigmac and sigmact, it is possible to estimate the degree of sample disturbance. When the value of sigmac is closer to sigmact, the sampling disturbance approaches zero. As the value of sigmac reduces, the degree of sampling disturbance increases. The possibility of using this degree of sample disturbance from compressibility data to obtain other true properties from laboratory results of the sampled specimens has been examined.

A Strategy for Conserving the Biodiversity of the Uttara Kannada District in South India

Taking the various values ascribed to biodiversity as its point of departure rather many years ago, the present study aims at deriving a conservation strategy for Uttara Kannada. This hilly district, with the highest proportion of its area under forests in South India, is divided into five ecological zones: coastal, northern evergreen, southern evergreen, moist deciduous, and dry deciduous. The heavily-populated coastal zone includes mangrove forests and estuarine wetlands. The evergreen forests are particularly rich in the diversity of plant species which they support - including wild relatives of a number of cultivated plants. They also serve a vital function in watershed conservation. The moist deciduous forests are rich in bird species; both moist and dry deciduous forests include a number of freshwater ponds and lakes that support a high diversity of aquatic birds.Reviewing the overall distribution of biodiversity, we identify specific localities - including estuaries, evergreen forests, and moist deciduous forests - which should be set aside as Nature reserves. These larger reserves must be complemented by a network of traditionally-protected sacred groves and sacred trees that are distributed throughout the district and that protect today, for instance, the finest surviving stand of dipterocarp trees.We also spell out the necessary policy-changes in overall development strategy that should stem the ongoing decimation of biodiversity. These include (1) revitalizing community-based systems of sustainable management of village forests and protection of sacred groves and trees; (2) reorienting the usage-pattern of reserve forests from production of a limited variety of timber and softwood species for industrial consumers, to production of a larger diversity of non-wood forest produce of commercial value to support the rural economy; (3) utilizing marginal lands under private ownership for generating industrial wood supplies; and (4) provision of incentives for in situ maintenance of land-races of cultivated plants - especially evergreen, fruit-yielding trees - by the local people.It is proposed that this broad framework be now taken to the local communities, and that an action-plan be developed on the basis of inputs provided - and initiatives taken - by them.

Microbial identification by detection of ligation probes on DNA microarray

Microbes in natural and artificial environments as well as in the human body are a key part of the functional properties of these complex systems. The presence or absence of certain microbial taxa is a correlate of functional status like risk of disease or course of metabolic processes of a microbial community. As microbes are highly diverse and mostly notcultivable, molecular markers like gene sequences are a potential basis for detection and identification of key types. The goal of this thesis was to study molecular methods for identification of microbial DNA in order to develop a tool for analysis of environmental and clinical DNA samples. Particular emphasis was placed on specificity of detection which is a major challenge when analyzing complex microbial communities. The approach taken in this study was the application and optimization of enzymatic ligation of DNA probes coupled with microarray read-out for high-throughput microbial profiling. The results show that fungal phylotypes and human papillomavirus genotypes could be accurately identified from pools of PCR amplicons generated from purified sample DNA. Approximately 1 ng/μl of sample DNA was needed for representative PCR amplification as measured by comparisons between clone sequencing and microarray. A minimum of 0,25 amol/μl of PCR amplicons was detectable from amongst 5 ng/μl of background DNA, suggesting that the detection limit of the test comprising of ligation reaction followed by microarray read-out was approximately 0,04%. Detection from sample DNA directly was shown to be feasible with probes forming a circular molecule upon ligation followed by PCR amplification of the probe. In this approach, the minimum detectable relative amount of target genome was found to be 1% of all genomes in the sample as estimated from 454 deep sequencing results. Signal-to-noise of contact printed microarrays could be improved by using an internal microarray hybridization control oligonucleotide probe together with a computational algorithm. The algorithm was based on identification of a bias in the microarray data and correction of the bias as shown by simulated and real data. The results further suggest semiquantitative detection to be possible by ligation detection, allowing estimation of target abundance in a sample. However, in practise, comprehensive sequence information of full length rRNA genes is needed to support probe design with complex samples. This study shows that DNA microarray has the potential for an accurate microbial diagnostic platform to take advantage of increasing sequence data and to replace traditional, less efficient methods that still dominate routine testing in laboratories. The data suggests that ligation reaction based microarray assay can be optimized to a degree that allows good signal-tonoise and semiquantitative detection.

Photocatalytic Inactivation of Escherichia coli with LbL Fabricated Immobilized TiO2 Thin Films

Photocatalysis using semiconductor catalyst such as TiO2, in presence of UV light, is a promising technique for the inactivation of various microorganisms present in water. In the current study, the photocatalytic inactivation of Escherichia coli bacteria was studied with commercial Degussa Aeroxide TiO2 P25 (Aeroxide) and combustion synthesized TiO2 (CS TiO2) catalysts immobilized on glass slides in presence of UV irradiation. Thin films of the catalyst and polyelectrolytes, poly(allyl amine hydrochloride) and poly(styrene sulfonate sodium salt), were deposited on glass slides by layer by layer (LbL) deposition method and characterized by SEM and AFM imaging. The effect of various parameters, namely, catalyst concentration, surface area and number of bilayers, on inactivation was studied. Maximum inactivation of 8-log reduction in the viable count was observed with 1.227 mg/cm(2) of catalyst loaded slides. With this loading, complete inactivation was observed within 90 min and 75 min of irradiation, for Aeroxide and CS TiO2, respectively. Further increase in the catalyst concentration or increasing number of bilayers had no significant effect on inactivation. The effect of surface area on the inactivation was studied by increasing the number of slides and the inactivation was observed to increase with increasing surface area. It was also observed that the immobilized catalyst slides can be used for several cycles leading to an economic process. The study shows potential application of TiO2, for the inactivation of bacteria, in its fixed form by a simple immobilization technique.

Aerodynamics of delta wings with flaps at hypersonic speeds

Control surface effectiveness is an important parameter for any aeroplane. For a hypersonic aircraft, though the power required to operate the flaps is determined by low speed flying conditions, it is imperative to know the effect of flaps at hypersonic speeds. Hence, studies have been done on this topic by aerodynamicists for over 40 years. In spite of this, only a limited data is available in the literature on this subject. This paper discusses the experimental study of the effect of sweep on the aerodynamic characteristics of thin slab delta wings with flaps at hypersonic speeds. For the purpose of this investigation, a novel special thin six-component balance, which has a thickness of 4mm and can be housed inside wings with 8mm thickness, has been designed. The wings had a sweep of 76degrees, 70degrees and 65degrees, t/c of 0.053 and flaps with 12% of wing area and 12% of wing chord. Testing were done at Mach 8.2, Re number of 2.13 x 10(6) (based on chord), from alpha = -12degrees to 12degrees and flap angle of 20degrees, 30degrees and 40degrees. Separation lengths, measured from Schlieren pictures, clearly show that there is 'no appreciable' effect of sweep on them. Also, using a simple local flow field calculation, the separation has been identified to be transitional in nature. These features of separation reflect in the force data. Because of the small separation length, the flaps (inspite of their small size) were very effective in generating additional C-N, C-M and C-l, which increased with increase in flap angle. In general, the C-N, C-M and X-CP were unaffected by sweep for symmetric flap deflection at positive incidences and asymmetric flap case, For symmetric flap case at negative incidences, only C-N was not influenced by the sweep but C-M decreased and X-CP moved upstream as the sweep is decreased, The wing with lower sweep produces higher CA and lower (L/D)(max) for both symmetric and asymmetric flaps. The rolling moment and adverse yaw increased with decrease in sweep for asymmetric flap deflection. Newtonian theory is shown to be incapable of predicting the effect of sweep on C-l, C-n and on the incremental values of C-N, C-M and C-A. In conclusion, it can be said that a small flap is generally adequate for hypersonic aeroplanes provided they operate at altitudes where transitional and turbulent separation can be expected to occur. This would make the flaps effective and thus enable ample control authority.

Evaluation and improvement of total transfer capability - A case study

With deregulation, the total transfer capability (TTC) calculation, which is the basis for evaluating available transfer capability (ATC), has become very significant. TTC is an important index in power markets with large volume of inter-area power exchanges and wheeling transactions taking place on an hourly basis. Its computation helps to achieve a viable technical and commercial transmission operation. The aim of the paper is to evaluate TTC in the interconnections and also to improve it using reactive optimization technique and UPFC devices. Computations are carried out for normal and contingency cases such as single line, tie line and generator outages. Base and optimized results are presented, and the results show how reactive optimization and unified power flow controller help to improve the system conditions. In this paper repeated power flow method is used to calculate TTC due to its ease of implementation. A case study is carried out on a 205 bus equivalent system, a part of Indian Southern grid. Parameters like voltage magnitude, L-index, minimum singular value and MW losses are computed to analyze the system performance.

Effect of convection on domain growth during demixing transitions in fluids

Current analytical work on the effect of convection on the late stages of spinodal decomposition in liquids is briefly described. The morphology formed during the spinodal decomposition process depends on the relative composition of the two species. Droplet spinodal decomposition occurs when the concentration of one of the species is small. Convective transport has a significant effect on the scaling laws in the late-stage coarsening of droplets in translational or shear flows. In addition, convective transport could result in an attractive interaction between non-Brownian droplets which could lead to coalescence. The effect of convective transport for the growth of random interfaces in a near-symmetric quench was analysed using an area distribution function, which gives the distribution of surface area of the interface in curvature space. It was found that the curvature of the interface decreases proportional to time t in the late stages of spinodal decomposition, and the surface area also decreases proportional to t.

Influence of land use changes in river basins on diversity and distribution of amphibians

Land-use changes influence local biodiversity directly, and also cumulatively, contribute to regional and global changes in natural systems and quality of life. Consequent to these, direct impacts on the natural resources that support the health and integrity of living beings are evident in recent times. The Western Ghats being one of the global biodiversity hotspots, is reeling under a tremendous pressure from human induced changes in terms of developmental projects like hydel or thermal power plants, big dams, mining activities, unplanned agricultural practices,monoculture plantations, illegal timber logging, etc. This has led to the once contiguous forest habitats to be fragmented in patches, which in turn has led to the shrinkage of original habitat for the wildlife, change in the hydrological regime of the catchment, decreased inflow in streams,human-animal conflicts, etc. Under such circumstances, a proper management practice is called for requiring suitable biological indicators to show the impact of these changes, set priority regions and in developing models for conservation planning. Amphibians are regarded as one of the best biological indicators due to their sensitivity to even the slightest changes in the environment and hence they could be used as surrogates in conservation and management practices. They are the predominating vertebrates with a high degree of endemism (78%) in Western Ghats. The present study is an attempt to bring in the impacts of various land-uses on anuran distribution in three river basins. Sampling was carried out for amphibians during all seasons of 2003-2006 in basins of Sharavathi, Aghanashini and Bedthi. There are as many as 46 species in the region, one of which is new to science and nearly 59% of them are endemic to the Western Ghats. They belong to nine families, Dicroglossidae being represented by 14 species,followed by Rhacophoridae (9 species) and Ranidae (5 species). Species richness is high in Sharavathi river basin, with 36 species, followed by Bedthi 33 and Aghanashini 27. The impact of land-use changes, was investigated in the upper catchment of Sharavathi river basin. Species diversity indices, relative abundance values, percentage endemics gave clear indication of differences in each sub-catchment. Karl Pearson’s correlation coefficient (r) was calculated between species richness, endemics, environmental descriptors, land-use classes and fragmentation metrics. Principal component analysis was performed to depict the influence of these variables. Results show that sub-catchments with lesser percentage of forest, low canopy cover, higher amount of agricultural area, low rainfall have low species richness, less endemic species and abundant non-endemic species, whereas endemism, species richness and abundance of endemic species are more in the sub-catchments with high tree density, endemic trees, canopy cover, rainfall and lower amount of agriculture fields. This analysis aided in prioritising regions in the Sharavathi river basin for further conservation measures.

Seismic Hazard and Microzonation Studies using Geographic Information System - A Case Study of Bangalore city

Seismic hazard and microzonation of cities enable to characterize the potential seismic areas that need to be taken into account when designing new structures or retrofitting the existing ones. Study of seismic hazard and preparation of geotechnical microzonation maps has been attempted using Geographical Information System (GIS). GIS will provide an effective solution for integrating different layers of information thus providing a useful input for city planning and in particular input to earthquake resistant design of structures in an area. Seismic hazard is the study of expected earthquake ground motions at any point on the earth. Microzonation is the process of sub division of region in to number of zones based on the earthquake effects in the local scale. Seismic microzonation is the process of estimating response of soil layers under earthquake excitation and thus the variation of ground motion characteristic on the ground surface. For the seismic microzonation, geotechnical site characterization need to be assessed at local scale (micro level), which is further used to assess of the site response and liquefaction susceptibility of the sites. Seismotectonic atlas of the area having a radius of 350km around Bangalore has been prepared with all the seismogenic sources and historic earthquake events (a catalogue of about 1400 events since 1906). We have attempted to carryout the site characterization of Bangalore by collating conventional geotechnical boreholes data (about 900 borehole data with depth) and integrated in GIS. 3-D subsurface model of Bangalore prepared using GIS is shown in Figure 1.Further, Shear wave velocity survey based on geophysical method at about 60 locations in the city has been carried out in 220 square Kms area. Site response and local site effects have been evaluated using 1-dimensional ground response analysis. Spatial variability of soil overburden depths, ground surface Peak Ground Acceleration’s(PGA), spectral acceleration for different frequencies, liquefaction susceptibility have been mapped in the 220 sq km area using GIS.ArcInfo software has been used for this purpose. These maps can be used for the city planning and risk & vulnerability studies. Figure 2 shows a map of peak ground acceleration at rock level for Bangalore city. Microtremor experiments were jointly carried out with NGRI scientists at about 55 locations in the city and the predominant frequency of the overburden soil columns were evaluated.

On the Limits of Spatial Reuse and Cooperative Communication for Dense Wireless Networks

We consider a dense ad hoc wireless network comprising n nodes confined to a given two dimensional region of fixed area. For the Gupta-Kumar random traffic model and a realistic interference and path loss model (i.e., the channel power gains are bounded above, and are bounded below by a strictly positive number), we study the scaling of the aggregate end-to-end throughput with respect to the network average power constraint, P macr, and the number of nodes, n. The network power constraint P macr is related to the per node power constraint, P macr, as P macr = np. For large P, we show that the throughput saturates as Theta(log(P macr)), irrespective of the number of nodes in the network. For moderate P, which can accommodate spatial reuse to improve end-to-end throughput, we observe that the amount of spatial reuse feasible in the network is limited by the diameter of the network. In fact, we observe that the end-to-end path loss in the network and the amount of spatial reuse feasible in the network are inversely proportional. This puts a restriction on the gains achievable using the cooperative communication techniques studied in and, as these rely on direct long distance communication over the network.