Pricing derivatives with stochastic volatility

This Ph.D. thesis contains 4 essays in mathematical finance with a focus on pricing Asian option (Chapter 4), pricing futures and futures option (Chapter 5 and Chapter 6) and time dependent volatility in futures option (Chapter 7). In Chapter 4, the applicability of the Albrecher et al.(2005)'s comonotonicity approach was investigated in the context of various benchmark models for equities and com- modities. Instead of classical Levy models as in Albrecher et al.(2005), the focus is the Heston stochastic volatility model, the constant elasticity of variance (CEV) model and the Schwartz (1997) two-factor model. It is shown that the method delivers rather tight upper bounds for the prices of Asian Options in these models and as a by-product delivers super-hedging strategies which can be easily implemented. In Chapter 5, two types of three-factor models were studied to give the value of com- modities futures contracts, which allow volatility to be stochastic. Both these two models have closed-form solutions for futures contracts price. However, it is shown that Model 2 is better than Model 1 theoretically and also performs very well empiri- cally. Moreover, Model 2 can easily be implemented in practice. In comparison to the Schwartz (1997) two-factor model, it is shown that Model 2 has its unique advantages; hence, it is also a good choice to price the value of commodity futures contracts. Fur- thermore, if these two models are used at the same time, a more accurate price for commodity futures contracts can be obtained in most situations. In Chapter 6, the applicability of the asymptotic approach developed in Fouque et al.(2000b) was investigated for pricing commodity futures options in a Schwartz (1997) multi-factor model, featuring both stochastic convenience yield and stochastic volatility. It is shown that the zero-order term in the expansion coincides with the Schwartz (1997) two-factor term, with averaged volatility, and an explicit expression for the first-order correction term is provided. With empirical data from the natural gas futures market, it is also demonstrated that a significantly better calibration can be achieved by using the correction term as compared to the standard Schwartz (1997) two-factor expression, at virtually no extra effort. In Chapter 7, a new pricing formula is derived for futures options in the Schwartz (1997) two-factor model with time dependent spot volatility. The pricing formula can also be used to find the result of the time dependent spot volatility with futures options prices in the market. Furthermore, the limitations of the method that is used to find the time dependent spot volatility will be explained, and it is also shown how to make sure of its accuracy.

A study on the effect of functional distribution of income on aggregate demand

In this thesis, we study the causal relationship between functional distribution of income and economic growth. In particular, we focus on some of the aspects that might alter the effect of the profit share on growth. After a brief introduction and literature review, the empirical contributions will be presented in Chapters 3,4 and 5. Chapter 3 analyses the effect of a contemporaneous decrease in the wage share among countries that are major trade partners. Falling wage share and wage moderation are a global phenomenon which are hardly opposed by governments. This is because lower wages are associated with lower export prices and, therefore, have a positive effect on net-exports. There is, however, a fallacy of composition problem: not all countries can improve their balance of payments contemporaneously. Studying the country members of the North America Free Trade Agreement, we find that the effect on export of a contemporaneous decrease in the wage share in Mexico, Canada and the United States, is negative in all countries. In other words, the competitive advantage that each country gains because of a reduction in its wage share (to which is associated a decrease in export prices), is offset by a contemporaneous increase in competitiveness in the other two countries. Moreover, we find that NAFTA is overall wage-led: the profit share has a negative effect on aggregate demand. Chapter 4 tests whether it is possible that the effect of the profit share on growth is different in the long run and in the short run. Following Blecker (2014) our hypothesis is that in the short run the growth regime is less wage-led than it is in the long run. The results of our empirical investigation support this hypothesis, at least for the United States over the period 1950-2014. The effect of wages on consumption increases more than proportionally compared to the effect of profits on consumption from the short to the long run. Moreover, consumer debt seem to have only a short-run effect on consumption indicating that in the long run, when debt has to be repaid, consumption depends more on the level of income and on how it is distributed. Regarding investment, the effect of capacity utilization is always larger than the effect of the profit share and that the difference between the two effects is higher in the long run than in the short run. This confirms the hypothesis that in the long run, unless there is an increase in demand, it is likely that firms are not going to increase investments even in the presence of high profits. In addition, the rentier share of profits – that comprises dividends and interest payments – has a long-run negative effect on investment. In the long run rentiers divert firms’ profits from investment and, therefore, it weakens the effect of profits on investment. Finally, Chapter 5 studies the possibility of structural breaks in the relationship between functional distribution of income and growth. We argue that, from the 1980s, financialization and the European exchange rate agreements weakened the positive effect of the profit share on growth in Italy. The growth regime is therefore becoming less profit-led and more wage-led. Our results confirm this hypothesis and also shed light on the concept of cooperative and conflictual regimes as defined by Bhaduri and Marglin (1990).

A divide-and-conquer bound for aggregate's quality and algebraic connectivity

info:eu-repo/semantics/submittedForPublication

Essays on Uncertainty, Imperfect Information, and Investment Dynamics

Understanding how imperfect information affects firms' investment decision helps answer important questions in economics, such as how we may better measure economic uncertainty; how firms' forecasts would affect their decision-making when their beliefs are not backed by economic fundamentals; and how important are the business cycle impacts of changes in firms' productivity uncertainty in an environment of incomplete information. This dissertation provides a synthetic answer to all these questions, both empirically and theoretically. The first chapter, provides empirical evidence to demonstrate that survey-based forecast dispersion identifies a distinctive type of second moment shocks different from the canonical volatility shocks to productivity, i.e. uncertainty shocks. Such forecast disagreement disturbances can affect the distribution of firm-level beliefs regardless of whether or not belief changes are backed by changes in economic fundamentals. At the aggregate level, innovations that increase the dispersion of firms' forecasts lead to persistent declines in aggregate investment and output, which are followed by a slow recovery. On the contrary, the larger dispersion of future firm-specific productivity innovations, the standard way to measure economic uncertainty, delivers the ``wait and see" effect, such that aggregate investment experiences a sharp decline, followed by a quick rebound, and then overshoots. At the firm level, data uncovers that more productive firms increase investments given rises in productivity dispersion for the future, whereas investments drop when firms disagree more about the well-being of their future business conditions. These findings challenge the view that the dispersion of the firms' heterogeneous beliefs captures the concept of economic uncertainty, defined by a model of uncertainty shocks. The second chapter presents a general equilibrium model of heterogeneous firms subject to the real productivity uncertainty shocks and informational disagreement shocks. As firms cannot perfectly disentangle aggregate from idiosyncratic productivity because of imperfect information, information quality thus drives the wedge of difference between the unobserved productivity fundamentals, and the firms' beliefs about how productive they are. Distribution of the firms' beliefs is no longer perfectly aligned with the distribution of firm-level productivity across firms. This model not only explains why, at the macro and micro level, disagreement shocks are different from uncertainty shocks, as documented in Chapter 1, but helps reconcile a key challenge faced by the standard framework to study economic uncertainty: a trade-off between sizable business cycle effects due to changes in uncertainty, and the right amount of pro-cyclicality of firm-level investment rate dispersion, as measured by its correlation with the output cycles.

Volatility Spillover and Multivariate Volatility Impulse Response Analysis of GFC News Events

This paper applies two measures to assess spillovers across markets: the Diebold Yilmaz (2012) Spillover Index and the Hafner and Herwartz (2006) analysis of multivariate GARCH models using volatility impulse response analysis. We use two sets of data, daily realized volatility estimates taken from the Oxford Man RV library, running from the beginning of 2000 to October 2016, for the S&P500 and the FTSE, plus ten years of daily returns series for the New York Stock Exchange Index and the FTSE 100 index, from 3 January 2005 to 31 January 2015. Both data sets capture both the Global Financial Crisis (GFC) and the subsequent European Sovereign Debt Crisis (ESDC). The spillover index captures the transmission of volatility to and from markets, plus net spillovers. The key difference between the measures is that the spillover index captures an average of spillovers over a period, whilst volatility impulse responses (VIRF) have to be calibrated to conditional volatility estimated at a particular point in time. The VIRF provide information about the impact of independent shocks on volatility. In the latter analysis, we explore the impact of three different shocks, the onset of the GFC, which we date as 9 August 2007 (GFC1). It took a year for the financial crisis to come to a head, but it did so on 15 September 2008, (GFC2). The third shock is 9 May 2010. Our modelling includes leverage and asymmetric effects undertaken in the context of a multivariate GARCH model, which are then analysed using both BEKK and diagonal BEKK (DBEKK) models. A key result is that the impact of negative shocks is larger, in terms of the effects on variances and covariances, but shorter in duration, in this case a difference between three and six months.

Estimating dynamic models with aggregate shocks and an application to mortgage default in Colombia

We estimate a dynamic model of mortgage default for a cohort of Colombian debtors between 1997 and 2004. We use the estimated model to study the effects on default of a class of policies that affected the evolution of mortgage balances in Colombia during the 1990's. We propose a framework for estimating dynamic behavioral models accounting for the presence of unobserved state variables that are correlated across individuals and across time periods. We extend the standard literature on the structural estimation of dynamic models by incorporating an unobserved common correlated shock that affects all individuals' static payoffs and the dynamic continuation payoffs associated with different decisions. Given a standard parametric specification the dynamic problem, we show that the aggregate shocks are identified from the variation in the observed aggregate behavior. The shocks and their transition are separately identified, provided there is enough cross-sectionavl ariation of the observeds tates.

The meaning of implied volatility in pricing stock options traded in options markets

Ph.D. in the Faculty of Business Administration

The influence of organic amendments on soil aggregate stability from semiarid sites

Restoring the native vegetation is the most effective way to regenerate soil health. Under these conditions, vegetation cover in areas having degraded soils may be better sustained if the soil is amended with an external source of organic matter. The addition of organic materials to soils also increases infiltration rates and reduces erosion rates; these factors contribute to an available water increment and a successful and sustainable land management. The goal of this study was to analyze the effect of various organic amendments on the aggregate stability of soils in afforested plots. An experimental paired-plot layout was established in southern of Spain (homogeneous slope gradient: 7.5%; aspect: N170). Five amendments were applied in an experimental set of plots: straw mulching; mulch with chipped branches of Aleppo Pine (Pinus halepensis L.); TerraCotten hydroabsobent polymers; sewage sludge; sheep manure and control. Plots were afforested following the same spatial pattern, and amendments were mixed with the soil at the rate 10 Mg ha-1. The vegetation was planted in a grid pattern with 0.5 m between plants in each plot. During the afforestation process the soil was tilled to 25 cm depth from the surface. Soil from the afforested plots was sampled in: i) 6 months post-afforestation; ii) 12 months post-afforestation; iii) 18 months post-afforestation; and iv) 24 months post-afforestation. The sampling strategy for each plot involved collection of 4 disturbed soil samples taken from the surface (0–10 cm depth). The stability of aggregates was measured by wet-sieving. Regarding to soil aggregate stability, the percentage of stable aggregates has increased slightly in all the treatments in relation to control. Specifically, the differences were recorded in the fraction of macroaggregates (≥ 0.250 mm). The largest increases have been associated with straw mulch, pinus mulch and sludge. Similar results have been registered for the soil organic carbon content. Independent of the soil management, after six months, no significant differences in microaggregates were found regarding to the control plots. These results showed an increase in the stability of the macroaggregates when soil is amended with sludge, pinus mulch and straw much. This fact has been due to an increase in the number cementing agents due to: (i) the application of pinus, straw and sludge had resulted in the release of carbohydrates to the soil; and thus (ii) it has favored the development of a protective vegetation cover, which has increased the number of roots in the soil and the organic contribution to it.

BENEFICIAL REUSE OF LOCALLY-AVAILABLE WASTE MATERIALS AS LIGHTWEIGHT AGGREGATE IN LIGHTWEIGHT CONCRETE

This study investigated the physical characteristics of lightweight concrete produced using waste materials as coarse aggregate. The study was inspired by the author’s Peace Corps service in Kilwa, Tanzania. Coconut shell, sisal fiber, and PET plastic were chosen as the test waste products due to their abundance in the area. Two mixes were produced for each waste product and the mix proportions designed for resulting compressive strengths of 3000 and 5000 psi. The proportions were selected based on guidelines for lightweight concrete from the American Concrete Institute. In preparation for mixing, coconut shells were crushed into aggregate no larger than 3/4 inch, sisal fiber was cut into pieces no longer than 3/8 inch, and PET plastic was shredded into 1/4 inch-wide strips no longer than 6 inches. Replicate samples were mixed and then cured for 28 days before they were tested for compressive strength, unit weight, and absorption. The resulting data were compared to ASTM Standards for lightweight concrete masonry units to determine their adequacy. Based on these results, there is potential for coconut shell to be used as coarse aggregate in lightweight concrete. Sisal fiber was unsuccessful in producing the appropriate compressive strength. However, the reduction in spalling of the hardened concrete and the induction of air in the mixes incorporating sisal fiber suggests that it has the potential to improve other characteristics of lightweight concrete. Concrete mixes using PET plastic as aggregate resulted in adequate compressive strengths, but were too dense to be considered ‘lightweight’ concrete. With some adjustments to slightly decrease absorption and unit weight, the PET plastic concrete mixes could be classified as medium weight concrete and, therefore, achieve many of the same benefits as would be seen with lightweight concrete.

Motor- und Aggregate-Akustik : 9. Magdeburger Symposium ; Tagungsband

Prof. Dr.-Ing. Hermann Rottengruber, Dr.-Ing. Wilfried Henze, Dr.-Ing. Tommy Luft (Hrsg.) und 47 Mitautoren

Volatility transmission between stock and exchange-rate markets: A connectedness analysis

This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to January 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yilmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each market. To gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness during the financial turmoil periods experienced in the sample period Our results suggest that slightly more than half of the total variance of the forecast errors is explained by shocks across markets rather than by idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.

Synthetic portfolio for event studies: Estimating the effects of volatility call auctions

We propose a method denoted as synthetic portfolio for event studies in market microstructure that is particularly interesting to use with high frequency data and thinly traded markets. The method is based on Synthetic Control Method and provides a robust data driven method to build a counterfactual for evaluating the effects of the volatility call auctions. We find that SMC could be used if the loss function is defined as the difference between the returns of the asset and the returns of a synthetic portfolio. We apply SCM to test the performance of the volatility call auction as a circuit breaker in the context of an event study. We find that for Colombian Stock Market securities, the asynchronicity of intraday data reduces the analysis to a selected group of stocks, however it is possible to build a tracking portfolio. The realized volatility increases after the auction, indicating that the mechanism is not enhancing the price discovery process.

The EU ban on uncovered sovereign credit default swaps: assessing impacts on liquidity, volatility and price discovery

This article addresses the effects of the prohibition against naked CDS buying implemented by the European Union in November 2012. Three aspects of market quality are analyzed: liquidity, volatility, and price informativeness. Overall, our results suggest that the ban produced negative effects on liquidity and price informativeness. First, we find that in territories within the scope of the EU regulation, the bid–ask spreads on sovereign CDS contracts rose after the ban, but fell for countries outside its bounds. Open interest declined for both groups of CDS reference entities in our sample, but significantly more in the constraint group. Price delay increased more prominently for countries affected by the ban, whereas price precision decreased for these countries while increasing for CDSs written on other sovereign reference entities. Most notably, our findings indicate that hese negative effects were more pronounced amid reference entities exhibiting lower credit risk. With respect to volatility, the evidence suggests that the ban was successful in stabilizing the CDS market in that volatility decreased, particularly for contracts written on riskier CDS entities.

Seismic fragility assessment of unreiforced masonry aggregate buildings

Aggregate masonry buildings have been generated over the years, allowing the interaction of different aggregated structural units under seismic action. The first part of this work is focused on the seismic vulnerability and fragility assessment of clay brick masonry buildings, sited in Bologna (Italy), with reference, at first, to single isolated structural units, by means of the Response Surface statistical method, taking into account some variabilities and uncertainties involved in the problem. The seismic action was defined by means of a group of selected registered accelerograms, in order to analyse the effect of the variability of the earthquakes. Identical and different structural units chosen by the Response Surface generated simulations are then aggregated in row, in order to compare the collapse PGA referred to the isolated structural unit and the one referred to the aggregate structure. The second part is focused on the seismic vulnerability and fragility assessment of stone masonry structures, sited in Seixal (Portugal), applying a methodology similar to that used for the buildings sited in Bologna. Since the availability of several information, the analyses involved the assessment of the most prevalent structural typologies in the area, considering the variability of a set of structural and geometrical parameters. The results highlighted the importance of the statistic procedures as method able to consider the variabilities and the uncertainties involved in the problem of the fragility of unreinforced masonry structures, in absence of accurate investigations on the structural typologies, as in the Seixal case study. Furthermore, it was showed that the structural units along the unreinforced clay brick or stone masonry aggregates cannot be analysed as isolated, as they are affected by the effect of the aggregation with adjacent structural units, according to the different directions of the seismic action considered and to their different position along the row aggregate.

Bitumen aggregate adhesion and bitumen rheology of hard modified binders

The waterproofing of hydraulic structure is done traiditionally like laying road on dam surface but with specific modified binders. An italian firm recently patented a new method that is re-adaptation of typical surface treatment of roads. The purpose of this study is to find out best aggregate-bitumen mixture that can perform well under service conditions of a large hydraulic structure such as dams. So, 4 different hard modified bitumen were tested with 2 aggregate types i.e. limestone and basalt. The experimental program contained the testing of bitumen aggregate adhesion, using the rolling bottle test and rheology of hard modified binders using multiple stress creep and recovery test and dynamic viscosity test. The results and discussion are presented in detail in this work.