A trading strategy based on the lead–lag relationship between the spot index and futures contract for the FTSE 100

This paper examines the lead–lag relationship between the FTSE 100 index and index futures price employing a number of time series models. Using 10-min observations from June 1996–1997, it is found that lagged changes in the futures price can help to predict changes in the spot price. The best forecasting model is of the error correction type, allowing for the theoretical difference between spot and futures prices according to the cost of carry relationship. This predictive ability is in turn utilised to derive a trading strategy which is tested under real-world conditions to search for systematic profitable trading opportunities. It is revealed that although the model forecasts produce significantly higher returns than a passive benchmark, the model was unable to outperform the benchmark after allowing for transaction costs.

Forecasting real estate returns using financial spreads

This paper examines the predictability of real estate asset returns using a number of time series techniques. A vector autoregressive model, which incorporates financial spreads, is able to improve upon the out of sample forecasting performance of univariate time series models at a short forecasting horizon. However, as the forecasting horizon increases, the explanatory power of such models is reduced, so that returns on real estate assets are best forecast using the long term mean of the series. In the case of indirect property returns, such short-term forecasts can be turned into a trading rule that can generate excess returns over a buy-and-hold strategy gross of transactions costs, although none of the trading rules developed could cover the associated transactions costs. It is therefore concluded that such forecastability is entirely consistent with stock market efficiency.

Forecasting models of retail rents

The authors model retail rents in the United Kingdom with use of vector-autoregressive and time-series models. Two retail rent series are used, compiled by LaSalle Investment Management and CB Hillier Parker, and the emphasis is on forecasting. The results suggest that the use of the vector-autoregression and time-series models in this paper can pick up important features of the data that are useful for forecasting purposes. The relative forecasting performance of the models appears to be subject to the length of the forecast time-horizon. The results also show that the variables which were appropriate for inclusion in the vector-autoregression systems differ between the two rent series, suggesting that the structure of optimal models for predicting retail rents could be specific to the rent index used. Ex ante forecasts from our time-series suggest that both LaSalle Investment Management and CB Hillier Parker real retail rents will exhibit an annual growth rate above their long-term mean.

Linear and non-linear transmission of equity return volatility: evidence from the US, Japan and Australia

This paper models the transmission of shocks between the US, Japanese and Australian equity markets. Tests for the existence of linear and non-linear transmission of volatility across the markets are performed using parametric and non-parametric techniques. In particular the size and sign of return innovations are important factors in determining the degree of spillovers in volatility. It is found that a multivariate asymmetric GARCH formulation can explain almost all of the non-linear causality between markets. These results have important implications for the construction of models and forecasts of international equity returns.

A Double-threshold GARCH Model for the French Franc/Deutschmark exchange rate

This paper combines and generalizes a number of recent time series models of daily exchange rate series by using a SETAR model which also allows the variance equation of a GARCH specification for the error terms to be drawn from more than one regime. An application of the model to the French Franc/Deutschmark exchange rate demonstrates that out-of-sample forecasts for the exchange rate volatility are also improved when the restriction that the data it is drawn from a single regime is removed. This result highlights the importance of considering both types of regime shift (i.e. thresholds in variance as well as in mean) when analysing financial time series.

Linear and non-linear (non-)forecastability of high-frequency exchange rates

This paper forecasts Daily Sterling exchange rate returns using various naive, linear and non-linear univariate time-series models. The accuracy of the forecasts is evaluated using mean squared error and sign prediction criteria. These show only a very modest improvement over forecasts generated by a random walk model. The Pesaran–Timmerman test and a comparison with forecasts generated artificially shows that even the best models have no evidence of market timing ability.

A systematic approach to identify the sources of tropical SST errors in coupled models using the adjustment of initialised experiments

Understanding the sources of systematic errors in climate models is challenging because of coupled feedbacks and errors compensation. The developing seamless approach proposes that the identification and the correction of short term climate model errors have the potential to improve the modeled climate on longer time scales. In previous studies, initialised atmospheric simulations of a few days have been used to compare fast physics processes (convection, cloud processes) among models. The present study explores how initialised seasonal to decadal hindcasts (re-forecasts) relate transient week-to-month errors of the ocean and atmospheric components to the coupled model long-term pervasive SST errors. A protocol is designed to attribute the SST biases to the source processes. It includes five steps: (1) identify and describe biases in a coupled stabilized simulation, (2) determine the time scale of the advent of the bias and its propagation, (3) find the geographical origin of the bias, (4) evaluate the degree of coupling in the development of the bias, (5) find the field responsible for the bias. This strategy has been implemented with a set of experiments based on the initial adjustment of initialised simulations and exploring various degrees of coupling. In particular, hindcasts give the time scale of biases advent, regionally restored experiments show the geographical origin and ocean-only simulations isolate the field responsible for the bias and evaluate the degree of coupling in the bias development. This strategy is applied to four prominent SST biases of the IPSLCM5A-LR coupled model in the tropical Pacific, that are largely shared by other coupled models, including the Southeast Pacific warm bias and the equatorial cold tongue bias. Using the proposed protocol, we demonstrate that the East Pacific warm bias appears in a few months and is caused by a lack of upwelling due to too weak meridional coastal winds off Peru. The cold equatorial bias, which surprisingly takes 30 years to develop, is the result of an equatorward advection of midlatitude cold SST errors. Despite large development efforts, the current generation of coupled models shows only little improvement. The strategy proposed in this study is a further step to move from the current random ad hoc approach, to a bias-targeted, priority setting, systematic model development approach.

Comparing tropical precipitation simulated by the Met Office NWP and climate models with satellite observations

Forecasts of precipitation and water vapor made by the Met Office global numerical weather prediction (NWP) model are evaluated using products from satellite observations by the Special Sensor Microwave Imager/Sounder (SSMIS) and Tropical Rainfall Measuring Mission (TRMM) Multisatellite Precipitation Analysis (TMPA) for June–September 2011, with a focus on tropical areas (308S–308N). Consistent with previous studies, the predicted diurnal cycle of precipitation peaks too early (by ;3 h) and the amplitude is too strong over both tropical ocean and land regions. Most of the wet and dry precipitation biases, particularly those over land, can be explained by the diurnal-cycle discrepancies. An overall wet bias over the equatorial Pacific and Indian Oceans and a dry bias over the western Pacific warmpool and India are linked with similar biases in the climate model, which shares common parameterizations with the NWP version. Whereas precipitation biases develop within hours in the NWP model, underestimates in water vapor (which are assimilated by the NWP model) evolve over the first few days of the forecast. The NWP simulations are able to capture observed daily-to-intraseasonal variability in water vapor and precipitation, including fluctuations associated with tropical cyclones.

The potential of 1 h refractivity changes from an operational C-band magnetron-based radar for numerical weather prediction validation and data assimilation

Refractivity changes (ΔN) derived from radar ground clutter returns serve as a proxy for near-surface humidity changes (1 N unit ≡ 1% relative humidity at 20 °C). Previous studies have indicated that better humidity observations should improve forecasts of convection initiation. A preliminary assessment of the potential of refractivity retrievals from an operational magnetron-based C-band radar is presented. The increased phase noise at shorter wavelengths, exacerbated by the unknown position of the target within the 300 m gate, make it difficult to obtain absolute refractivity values, so we consider the information in 1 h changes. These have been derived to a range of 30 km with a spatial resolution of ∼4 km; the consistency of the individual estimates (within each 4 km × 4 km area) indicates that ΔN errors are about 1 N unit, in agreement with in situ observations. Measurements from an instrumented tower on summer days show that the 1 h refractivity changes up to a height of 100 m remain well correlated with near-surface values. The analysis of refractivity as represented in the operational Met Office Unified Model at 1.5, 4 and 12 km grid lengths demonstrates that, as model resolution increases, the spatial scales of the refractivity structures improve. It is shown that the magnitude of refractivity changes is progressively underestimated at larger grid lengths during summer. However, the daily time series of 1 h refractivity changes reveal that, whereas the radar-derived values are very well correlated with the in situ observations, the high-resolution model runs have little skill in getting the right values of ΔN in the right place at the right time. This suggests that the assimilation of these radar refractivity observations could benefit forecasts of the initiation of convection.

Systematic model forecast error in Rossby wave structure

Diabatic processes can alter Rossby wave structure; consequently errors arising from model processes propagate downstream. However, the chaotic spread of forecasts from initial condition uncertainty renders it difficult to trace back from root mean square forecast errors to model errors. Here diagnostics unaffected by phase errors are used, enabling investigation of systematic errors in Rossby waves in winter-season forecasts from three operational centers. Tropopause sharpness adjacent to ridges decreases with forecast lead time. It depends strongly on model resolution, even though models are examined on a common grid. Rossby wave amplitude reduces with lead time up to about five days, consistent with under-representation of diabatic modification and transport of air from the lower troposphere into upper-tropospheric ridges, and with too weak humidity gradients across the tropopause. However, amplitude also decreases when resolution is decreased. Further work is necessary to isolate the contribution from errors in the representation of diabatic processes.

The interpretation and use of biases in decadal climate predictions

Decadal climate predictions exhibit large biases, which are often subtracted and forgotten. However, understanding the causes of bias is essential to guide efforts to improve prediction systems, and may offer additional benefits. Here the origins of biases in decadal predictions are investigated, including whether analysis of these biases might provide useful information. The focus is especially on the lead-time-dependent bias tendency. A “toy” model of a prediction system is initially developed and used to show that there are several distinct contributions to bias tendency. Contributions from sampling of internal variability and a start-time-dependent forcing bias can be estimated and removed to obtain a much improved estimate of the true bias tendency, which can provide information about errors in the underlying model and/or errors in the specification of forcings. It is argued that the true bias tendency, not the total bias tendency, should be used to adjust decadal forecasts. The methods developed are applied to decadal hindcasts of global mean temperature made using the Hadley Centre Coupled Model, version 3 (HadCM3), climate model, and it is found that this model exhibits a small positive bias tendency in the ensemble mean. When considering different model versions, it is shown that the true bias tendency is very highly correlated with both the transient climate response (TCR) and non–greenhouse gas forcing trends, and can therefore be used to obtain observationally constrained estimates of these relevant physical quantities.

September Arctic sea-ice minimum predicted by spring melt-pond fraction

The area of Arctic September sea ice has diminished from about 7 million km2 in the 1990s to less than 5 million km2 in five of the past seven years, with a record minimum of 3.6 million km2 in 2012 (ref. 1). The strength of this decrease is greater than expected by the scientific community, the reasons for this are not fully understood, and its simulation is an on-going challenge for existing climate models2, 3. With growing Arctic marine activity there is an urgent demand for forecasting Arctic summer sea ice4. Previous attempts at seasonal forecasts of ice extent were of limited skill5, 6, 7, 8, 9. However, here we show that the Arctic sea-ice minimum can be accurately forecasted from melt-pond area in spring. We find a strong correlation between the spring pond fraction and September sea-ice extent. This is explained by a positive feedback mechanism: more ponds reduce the albedo; a lower albedo causes more melting; more melting increases pond fraction. Our results help explain the acceleration of Arctic sea-ice decrease during the past decade. The inclusion of our new melt-pond model10 promises to improve the skill of future forecast and climate models in Arctic regions and beyond.

A case study of sea breeze blocking regulated by sea surface temperature along the English south coast

The sensitivity of sea breeze structure to sea surface temperature (SST) and coastal orography is investigated in convection-permitting Met Office Unified Model simulations of a case study along the south coast of England. Changes in SST of 1 K are shown to significantly modify the structure of the sea breeze immediately offshore. On the day of the case study, the sea breeze was partially blocked by coastal orography, particularly within Lyme Bay. The extent to which the flow is blocked depends strongly on the static stability of the marine boundary layer. In experiments with colder SST, the marine boundary layer is more stable, and the degree of blocking is more pronounced. Although a colder SST would also imply a larger land–sea temperature contrast and hence a stronger onshore wind – an effect which alone would discourage blocking – the increased static stability exerts a dominant control over whether blocking takes place. The implications of prescribing fixed SST from climatology in numerical weather prediction model forecasts of the sea breeze are discussed.

A peak reduction scheduling algorithm for storage devices on the low voltage network

Reinforcing the Low Voltage (LV) distribution network will become essential to ensure it remains within its operating constraints as demand on the network increases. The deployment of energy storage in the distribution network provides an alternative to conventional reinforcement. This paper presents a control methodology for energy storage to reduce peak demand in a distribution network based on day-ahead demand forecasts and historical demand data. The control methodology pre-processes the forecast data prior to a planning phase to build in resilience to the inevitable errors between the forecasted and actual demand. The algorithm uses no real time adjustment so has an economical advantage over traditional storage control algorithms. Results show that peak demand on a single phase of a feeder can be reduced even when there are differences between the forecasted and the actual demand. In particular, results are presented that demonstrate when the algorithm is applied to a large number of single phase demand aggregations that it is possible to identify which of these aggregations are the most suitable candidates for the control methodology.

Pan-Arctic and regional sea ice predictability: initialization month dependence

Seasonal-to-interannual predictions of Arctic sea ice may be important for Arctic communities and industries alike. Previous studies have suggested that Arctic sea ice is potentially predictable but that the skill of predictions of the September extent minimum, initialized in early summer, may be low. The authors demonstrate that a melt season “predictability barrier” and two predictability reemergence mechanisms, suggested by a previous study, are robust features of five global climate models. Analysis of idealized predictions with one of these models [Hadley Centre Global Environment Model, version 1.2 (HadGEM1.2)], initialized in January, May and July, demonstrates that this predictability barrier exists in initialized forecasts as well. As a result, the skill of sea ice extent and volume forecasts are strongly start date dependent and those that are initialized in May lose skill much faster than those initialized in January or July. Thus, in an operational setting, initializing predictions of extent and volume in July has strong advantages for the prediction of the September minimum when compared to predictions initialized in May. Furthermore, a regional analysis of sea ice predictability indicates that extent is predictable for longer in the seasonal ice zones of the North Atlantic and North Pacific than in the regions dominated by perennial ice in the central Arctic and marginal seas. In a number of the Eurasian shelf seas, which are important for Arctic shipping, only the forecasts initialized in July have continuous skill during the first summer. In contrast, predictability of ice volume persists for over 2 yr in the central Arctic but less in other regions.