Volatility changes caused by the trading system:a Markov switching application

An expanding literature exists to suggest that the trading mechanism can influence the volatility of security returns. This study adds to this literature by examining the impact that the introduction of SETS, on the London Stock Exchange, had on the volatility of security returns. Using a Markov switching regime change model security volatility is categorized as being in a regime of either high or low volatility. It is shown that prior to the introduction of SETS securities tended to be in a low volatility regime. At the time SETS was introduced securities moved to a high volatility regime. This suggests that volatility increased when SETS was introduced.

Exchange-traded funds and information asymmetry

This thesis focuses on three main questions. The first uses ExchangeTraded Funds (ETFs) to evaluate estimated adverse selection costs obtained spread decomposition models. The second compares the Probability of Informed Trading (PIN) in Exchange-Traded Funds to control securities. The third examines the intra-day ETF trading patterns. These spread decomposition models evaluated are Glosten and Harris (1988); George, Kaul, and Nimalendran (1991); Lin, Sanger, and Booth (1995); Madhavan, Richardson, and Roomans (1997); Huang and Stoll (1997). Using the characteristics of ETFs it is shown that only the Glosten and Harris (1988) and Madhavan, et al (1997) models provide theoretically consistent results. When the PIN measure is employed ETFs are shown to have greater PINs than control securities. The investigation of the intra-day trading patterns shows that return volatility and trading volume have a U-shaped intra-day pattern. A study of trading systems shows that ETFs on the American Stock Exchange (AMEX) have a U-shaped intra-day pattern of bid-ask spreads, while ETFs on NASDAQ do not. Specifically, ETFs on NASDAQ have higher bid-ask spreads at the market opening, then the lowest bid-ask spread in the middle of the day. At the close of the market, the bid-ask spread of ETFs on NASDAQ slightly elevated when compared to mid-day.

Intraday trading patterns in London listed exchange traded funds

In this paper we examine the intraday trading patterns of Exchange Traded Funds (ETFs) listed on the London Stock Exchange. ETFs have been shown to be characterised by much lower bid–ask spread costs and by lower levels of information asymmetry than individual securities. One possible explanation for intraday trading patterns is that concentration of trading arises at the start of the trading day because informed traders have private information that quickly diminishes in value as trading progresses. Since ETFs have lower trading costs and lower levels of information asymmetry we would expect these securities to display less pronounced intraday patterns than individual securities. We fail to find that ETFs are characterised by concentrated trading bouts during the day and therefore find support for the argument that information asymmetry is the cause of intraday volume patterns in stock markets. We find that ETF bid–ask spreads and volatility are elevated at the open but not at the close. This lends support to the “accumulation of information” explanation that sees high spreads and volatility at the open as a consequence of information accumulating during a market closure and impacting on the market when it next opens.

Accommodating energy price volatility in life cycle cost analysis of asphalt pavements

Energy price is related to more than half of the total life cycle cost of asphalt pavements. Furthermore, the fluctuation related to price of energy has been much higher than the general inflation and interest rate. This makes the energy price inflation an important variable that should be addressed when performing life cycle cost (LCC) studies re- garding asphalt pavements. The present value of future costs is highly sensitive to the selected discount rate. Therefore, the choice of the discount rate is the most critical element in LCC analysis during the life time of a project. The objective of the paper is to present a discount rate for asphalt pavement projects as a function of interest rate, general inflation and energy price inflation. The discount rate is defined based on the portion of the energy related costs during the life time of the pavement. Consequently, it can reflect the financial risks related to the energy price in asphalt pavement projects. It is suggested that a discount rate sensitivity analysis for asphalt pavements in Sweden should range between –20 and 30%.

Pricing-to-market using EGARCH-error correction model

In this paper, the authors use an exponential generalized autoregressive conditional heteroscedastic (EGARCH) error-correction model (ECM), that is, EGARCH-ECM, to estimate the pass-through effects of foreign exchange (FX) rates and producers’ prices for 20 U.K. export sectors. The long-run adjustment of export prices to FX rates and producers’ prices is within the range of -1.02% (for the Textiles sector) and -17.22% (for the Meat sector). The contemporaneous pricing-to-market (PTM) coefficient is within the range of -72.84% (for the Fuels sector) and -8.05% (for the Textiles sector). Short-run FX rate pass-through is not complete even after several months. Rolling EGARCH-ECMs show that the short and long-run effects of FX rate and producers’ prices fluctuate substantially as are asymmetry and volatility estimates before equilibrium is achieved.

Long-range, high bit-rate secure key distribution link utilizing Raman Ultra-long fiber laser (UFL)

The distribution of the secret key is the weakest link of many data encryption systems. Quantum key distribution (QKD) schemes provide attractive solutions [1], however their implementation remains challenging and their range and bit-rate are limited. Moreover, practical QKD systems, employ real-life components and are, therefore, vulnerable to diverse attack schemes [2]. Ultra-Long fiber lasers (UFLs) have been drawing much attention recently because of their fundamentally different properties compared to conventional lasers as well as their unique applications [3]. Here, we demonstrate a 100Bps, practically secure key distribution, over a 500km link, employing Raman gain UFL. Fig. 1(a) depicts a schematic of the UFL system. Each user has an identical set of two wavelength selective mirrors centered at l0 and l 1. In order to exchange a key-bit, each user independently choose one of these mirrors and introduces it as a laser reflector at their end. If both users choose identical mirrors, a clear signal develops and the bits in these cases are discarded. However if they choose complementary mirrors, (1, 0 or 0, 1 states), the UFL remains below lasing threshold and no signal evolves. In these cases, an eavesdropper can only detect noise and is unable to determine the mirror choice of the users, where the choice of mirrors represent a single key bit (e.g. Alice's choice of mirror is the key-bit). These bits are kept and added to the key. The absence of signal in the secure states faxilitates fast measurements to distinguish between the non-secure and the secure states and to determine the key-bit in the later case, Sequentially reapeating the single bit exchange protocol generate the entire keys of any desirable length. © 2013 IEEE.

Derivatív pénzügyi termékek árdinamikája és az új típusú kamatlábmodellek (Interest rate models and the price processes of financial derivatives)

Ennek a cikknek az a célja, hogy áttekintést adjon annak a folyamatnak néhány főbb állomásáról, amit Black, Scholes és Merton opcióárazásról írt cikkei indítottak el a 70-es évek elején, és ami egyszerre forradalmasította a fejlett nyugati pénzügyi piacokat és a pénzügyi elméletet. / === / This review article compares the development of financial theory within and outside Hungary in the last three decades starting with the Black-Scholes revolution. Problems like the term structure of interest rate volatilities which is in the focus of many research internationally has not received the proper attention among the Hungarian economists. The article gives an overview of no-arbitrage pricing, the partial differential equation approach and the related numerical techniques, like the lattice methods in pricing financial derivatives. The relevant concepts of the martingal approach are overviewed. There is a special focus on the HJM framework of the interest rate development. The idea that the volatility and the correlation can be traded is a new horizon to the Hungarian capital market.

Volt-e likviditási válság? Volatilitás és likviditás kapcsolatának vizsgálata (Was there a liquidity crisis? Analysis the relationship between volatility and liquidity)

Széleskörűen alátámasztott, empirikus tény, hogy önmagában a nagyobb volatilitás csökkenti a piac likviditását, vagyis változékonyabb piacokon várhatóan nagyobb lesz egy-egy tranzakció áreltérítő hatása. Kutatásomban azt a kérdést vizsgáltam, hogy a Budapesti Értéktőzsdén az OTP-részvény piacán a 2007/2008-as válságban tapasztalható, átmeneti likviditáscsökkenés betudható volt-e egyszerűen a megnövekedett volatilitásnak, vagy ezen túl abban más tényezők (pl. a szereplők körének és viselkedésének drasztikus megváltozása, általános forráscsökkenés stb.) is szerepet játszhattak-e. A volatilitást a loghozamok szórásával, illetve a tényleges ársávval, míg az illikviditást a Budapesti Likviditási Mértékkel (BLM) reprezentáltam. Egyrészt azt állapítottam meg, hogy az OTP esetében a tényleges ársáv szorosabban korrelál a BLM-mel, mint a szórás. Másrészt az is egyértelmű, hogy a válság előtti kapcsolat a volatilitás és a likviditás között a válságban és azután már jelentősen megváltozott. Válságban az illikviditás jóval nagyobb volt, mint amit a volatilitás növekedése alapján vártunk, a válság lecsengése után azonban megfordult ez a reláció. _________ It is a widely supported empirical fact, that the greater volatility in itself decreases the liquidity of the market, namely more volatile a market is, the higher a transaction’s price impact will be. I have examined in my paper the question, whether the decrease of liquidity during the crisis of 2007/2008 in case of the OTP stock – traded on the Budapest Stock Exchange – was the consequence of the increased volatility, or other factors had an effect on the illiquidity as well (e.g.: the drastic change of market participants’ behaviour; reduction of fi nancing sources; etc.). I have represented volatility with the standard deviation of the logreturns, and with the true range, while the illiquidity with the Budapest Liquidity Measure (BLM). On one hand I have identifi ed, that in case of the OTP, the true range has a stronger relationship with the BLM than the standard deviation has. On the other hand it was clear, that the relationship between volatility and liquidity has changed notably during and after the crisis. During crisis the illiquidity was greater than what I have estimated based on the volatility increase, but after the crisis this relation has changed.

A study of stock market fluctuations and their relation to business conditions

Most research on stock prices is based on the present value model or the more general consumption-based model. When applied to real economic data, both of them are found unable to account for both the stock price level and its volatility. Three essays here attempt to both build a more realistic model, and to check whether there is still room for bubbles in explaining fluctuations in stock prices. In the second chapter, several innovations are simultaneously incorporated into the traditional present value model in order to produce more accurate model-based fundamental prices. These innovations comprise replacing with broad dividends the more narrow traditional dividends that are more commonly used, a nonlinear artificial neural network (ANN) forecasting procedure for these broad dividends instead of the more common linear forecasting models for narrow traditional dividends, and a stochastic discount rate in place of the constant discount rate. Empirical results show that the model described above predicts fundamental prices better, compared with alternative models using linear forecasting process, narrow dividends, or a constant discount factor. Nonetheless, actual prices are still largely detached from fundamental prices. The bubblelike deviations are found to coincide with business cycles. The third chapter examines possible cointegration of stock prices with fundamentals and non-fundamentals. The output gap is introduced to form the nonfundamental part of stock prices. I use a trivariate Vector Autoregression (TVAR) model and a single equation model to run cointegration tests between these three variables. Neither of the cointegration tests shows strong evidence of explosive behavior in the DJIA and S&P 500 data. Then, I applied a sup augmented Dickey-Fuller test to check for the existence of periodically collapsing bubbles in stock prices. Such bubbles are found in S&P data during the late 1990s. Employing econometric tests from the third chapter, I continue in the fourth chapter to examine whether bubbles exist in stock prices of conventional economic sectors on the New York Stock Exchange. The ‘old economy’ as a whole is not found to have bubbles. But, periodically collapsing bubbles are found in Material and Telecommunication Services sectors, and the Real Estate industry group.

Growth and gas exchange responses of Brazilian pepper (Schinus terebinthifolius) and native South Florida species to salinity

Schinus terebinthifolius Raddi (Schinus) is an invasive exotic species widely found in disturbed and native communities of Florida. This species has been shown to displace native species as well as alter community structure and function. The purpose of this study was to determine if the growth and gas exchange patterns of Schinus, under differing salinity conditions, were different from native species. Two native upland glycophytic species (Rapanea punctata and Randia aculeata) and two native mangrove species (Rhizophora mangle and Laguncularia racemosa) were compared with the exotic. Overall, the exotics morphologic changes and gas exchange patterns were most similar to R. mangle. Across treatments, increasing salinity decreased relative growth rate (RGR), leaf area ratio (LAR) and specific leaf area (SLA) but did not affect root/shoot ratios (R:S). Allocation patterns were however significantly different among species. The largest proportion of Schinus biomass was allocated to stems (47%), resulting in plants that were generally taller than the other species. Schinus also had the highest SLA and largest total leaf area of all species. This meant that the exotic, which was taller and had thinner leaves, was potentially able to maintain photosynthetic area comparable to native species. Schinus response patterns show that this exotic exhibits some physiological tolerance for saline conditions. Coupled with its biomass allocation patterns (more stem biomass and large area of thin leaves), the growth traits of this exotic potentially provide this species an advantage over native plants in terms of light acquisition in a brackish forested ecosystem.

Leaf gas exchange characteristics of three neotropical mangrove species in response to varying hydroperiod

We determined how different hydroperiods affected leaf gas exchange characteristics of greenhouse-grown seedlings (2002) and saplings (2003) of the mangrove species Avicennia germinans (L.) Stearn., Laguncularia racemosa (L.) Gaertn. f., and Rhizophora mangle L. Hydroperiod treatments included no flooding (unflooded), intermittent flooding (intermittent), and permanent flooding (flooded). Plants in the intermittent treatment were measured under both flooded and drained states and compared separately. In the greenhouse study, plants of all species maintained different leaf areas in the contrasting hydroperiods during both years. Assimilation-light response curves indicated that the different hydroperiods had little effect on leaf gas exchange characteristics in either seedlings or saplings. However, short-term intermittent flooding for between 6 and 22 days caused a 20% reduction in maximum leaf-level carbon assimilation rate, a 51% lower light requirement to attain 50% of maximum assimilation, and a 38% higher demand from dark respiration. Although interspecific differences were evident for nearly all measured parameters in both years, there was little consistency in ranking of the interspecific responses. Species by hydroperiod interactions were significant only for sapling leaf area. In a field study, R. mangle saplings along the Shark River in the Everglades National Park either demonstrated no significant effect or slight enhancement of carbon assimilation and water-use efficiency while flooded. We obtained little evidence that contrasting hydroperiods affect leaf gas exchange characteristics of mangrove seedlings or saplings over long time intervals; however, intermittent flooding may cause short-term depressions in leaf gas exchange. The resilience of mangrove systems to flooding, as demonstrated in the permanently flooded treatments, will likely promote photosynthetic and morphological adjustment to slight hydroperiod shifts in many settings.

A precise measurement of the two -photon exchange effect

The two-photon exchange phenomenon is believed to be responsible for the discrepancy observed between the ratio of proton electric and magnetic form factors, measured by the Rosenbluth and polarization transfer methods. This disagreement is about a factor of three at Q 2 of 5.6 GeV2. The precise knowledge of the proton form factors is of critical importance in understanding the structure of this nucleon. The theoretical models that estimate the size of the two-photon exchange (TPE) radiative correction are poorly constrained. This factor was found to be directly measurable by taking the ratio of the electron-proton and positron-proton elastic scattering cross sections, as the TPE effect changes sign with respect to the charge of the incident particle. A test run of a modified beamline has been conducted with the CEBAF Large Acceptance Spectrometer (CLAS) at Thomas Jefferson National Accelerator Facility. This test run demonstrated the feasibility of producing a mixed electron/positron beam of good quality. Extensive simulations performed prior to the run were used to reduce the background rate that limits the production luminosity. A 3.3 GeV primary electron beam was used that resulted in an average secondary lepton beam of 1 GeV. As a result, the elastic scattering data of both lepton types were obtained at scattering angles up to 40 degrees for Q2 up to 1.5 GeV2. The cross section ratio displayed an &epsis; dependence that was Q2 dependent at smaller Q2 limits. The magnitude of the average ratio as a function of &epsis; was consistent with the previous measurements, and the elastic (Blunden) model to within the experimental uncertainties. Ultimately, higher luminosity is needed to extend the data range to lower &epsis; where the TPE effect is predicted to be largest.

Three essays on the microstructure of exchange traded funds

Exchange traded funds (ETFs) have increased significantly in popularity since they were first introduced in 1993. However, there is still much that is unknown about ETFs in the extant literature. This dissertation attempts to fill gaps in the ETF literature by using three related essays. In these three essays, we compare ETFs to closed ended mutual funds (CEFs) by decomposing the bid-ask spread into its three components; we look at the intraday shape of ETFs and compare it to the intraday shape of equities as well as examine the co-integration factor between ETFs on the London Stock Exchange and the New York Stock Exchange; we also examine the differences between leveraged ETFs and unleveraged ETFs by analyzing the impact of liquidity and volatility. These three essays are presented in Chapters 1, 2, and 3, respectively. ^ Chapter one uses the Huang and Stoll (1997) model to decompose the bid-ask spread in CEFs and ETFs for two distinct periods—a normal and a volatile period. We show a higher adverse selection component for CEFs than for ETFs without regard to volatility. However, both ETFs and CEFs increased in magnitude of the adverse selection component in the period of high volatility. Chapter two uses a mix of the Werner and Kleidon (1993) and the Hupperets and Menkveld (2002) methods to get the intraday shape of ETFs and analyze co-integration between London and New York trading. We find two different shapes for New York and London ETFs. There also appears to be evidence of co-integration in the overlapping two-hour trading period but not over the entire trading day for the two locations. The third chapter discusses the new class of ETFs called leveraged ETFs. We examine the liquidity and depth differences between unleveraged and leveraged ETFs at the aggregate level and when the leveraged ETFs are classified by the leveraged multiples of -3, -2, -1, 2, and 3, both for a normal and a volatile period. We find distinct differences between leveraged and unleveraged ETFs at the aggregate level, with leveraged ETFs having larger spreads than unleveraged ETFs. Furthermore, while both leveraged and unleveraged ETFs have larger spreads in high volatility, for the leveraged ETFs the change in magnitude is significantly larger than for the unleveraged ETFs. Among the multiples, the -2 leveraged ETF is the most pronounced in its liquidity characteristics, more so in volatile times. ^

A Study of Stock Market Fluctuations and their Relations to Business Conditions

Most research on stock prices is based on the present value model or the more general consumption-based model. When applied to real economic data, both of them are found unable to account for both the stock price level and its volatility. Three essays here attempt to both build a more realistic model, and to check whether there is still room for bubbles in explaining fluctuations in stock prices. In the second chapter, several innovations are simultaneously incorporated into the traditional present value model in order to produce more accurate model-based fundamental prices. These innovations comprise replacing with broad dividends the more narrow traditional dividends that are more commonly used, a nonlinear artificial neural network (ANN) forecasting procedure for these broad dividends instead of the more common linear forecasting models for narrow traditional dividends, and a stochastic discount rate in place of the constant discount rate. Empirical results show that the model described above predicts fundamental prices better, compared with alternative models using linear forecasting process, narrow dividends, or a constant discount factor. Nonetheless, actual prices are still largely detached from fundamental prices. The bubble-like deviations are found to coincide with business cycles. The third chapter examines possible cointegration of stock prices with fundamentals and non-fundamentals. The output gap is introduced to form the non-fundamental part of stock prices. I use a trivariate Vector Autoregression (TVAR) model and a single equation model to run cointegration tests between these three variables. Neither of the cointegration tests shows strong evidence of explosive behavior in the DJIA and S&P 500 data. Then, I applied a sup augmented Dickey-Fuller test to check for the existence of periodically collapsing bubbles in stock prices. Such bubbles are found in S&P data during the late 1990s. Employing econometric tests from the third chapter, I continue in the fourth chapter to examine whether bubbles exist in stock prices of conventional economic sectors on the New York Stock Exchange. The ‘old economy’ as a whole is not found to have bubbles. But, periodically collapsing bubbles are found in Material and Telecommunication Services sectors, and the Real Estate industry group.

Investigation of spatial patterns of ground-water exchange with lakes, using a three-dimensional numerical model

Hydrogeologic variables controlling groundwater exchange with inflow and flow-through lakes were simulated using a three-dimensional numerical model (MODFLOW) to investigate and quantify spatial patterns of lake bed seepage and hydraulic head distributions in the porous medium surrounding the lakes. Also, the total annual inflow and outflow were calculated as a percentage of lake volume for flow-through lake simulations. The general exponential decline of seepage rates with distance offshore was best demonstrated at lower anisotropy ratio (i.e., Kh/Kv = 1, 10), with increasing deviation from the exponential pattern as anisotropy was increased to 100 and 1000. 2-D vertical section models constructed for comparison with 3-D models showed that groundwater heads and seepages were higher in 3-D simulations. Addition of low conductivity lake sediments decreased seepage rates nearshore and increased seepage rates offshore in inflow lakes, and increased the area of groundwater inseepage on the beds of flow-through lakes. Introduction of heterogeneity into the medium decreased the water table and seepage ratesnearshore, and increased seepage rates offshore in inflow lakes. A laterally restricted aquifer located at the downgradient side of the flow-through lake increased the area of outseepage. Recharge rate, lake depth and lake bed slope had relatively little effect on the spatial patterns of seepage rates and groundwater exchange with lakes.