International order flows: Explaining equity and exchange rate returns

Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructure – order flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications are also validated for intraday returns.

Uncertainty and Sensitivity Analysis in Aircraft Operating Costs in Structural Design Optimization

The paper focuses on the development of an aircraft design optimization methodology that models uncertainty and sensitivity analysis in the tradeoff between manufacturing cost, structural requirements, andaircraft direct operating cost.Specifically,ratherthanonlylooking atmanufacturingcost, direct operatingcost is also consideredintermsof the impact of weight on fuel burn, in addition to the acquisition cost to be borne by the operator. Ultimately, there is a tradeoff between driving design according to minimal weight and driving it according to reduced manufacturing cost. Theanalysis of cost is facilitated withagenetic-causal cost-modeling methodology,andthe structural analysis is driven by numerical expressions of appropriate failure modes that use ESDU International reference data. However, a key contribution of the paper is to investigate the modeling of uncertainty and to perform a sensitivity analysis to investigate the robustness of the optimization methodology. Stochastic distributions are used to characterize manufacturing cost distributions, andMonteCarlo analysis is performed in modeling the impact of uncertainty on the cost modeling. The results are then used in a sensitivity analysis that incorporates the optimization methodology. In addition to investigating manufacturing cost variance, the sensitivity of the optimization to fuel burn cost and structural loading are also investigated. It is found that the consideration of manufacturing cost does make an impact and results in a different optimal design configuration from that delivered by the minimal-weight method. However, it was shown that at lower applied loads there is a threshold fuel burn cost at which the optimization process needs to reduce weight, and this threshold decreases with increasing load. The new optimal solution results in lower direct operating cost with a predicted savings of 640=m2 of fuselage skin over the life, relating to a rough order-of-magnitude direct operating cost savings of $500,000 for the fuselage alone of a small regional jet. Moreover, it was found through the uncertainty analysis that the principle was not sensitive to cost variance, although the margins do change.

Determining generators' contribution to loads and line flows & losses considering loop flows

This paper presents a new method for calculating the individual generators' shares in line flows, line losses and loads. The method is described and illustrated on active power flows, but it can be applied in the same way to reactive power flows.

Commonality in Returns, Order Flows, and Liquidity in the Greek Stock Market

Using a unique high-frequency data-set on a comprehensive sample of Greek blue-chip stocks, spanning from September 2003 through March 2006, this note assesses the extent and role of commonality in returns, order flows (OFs), and liquidity. It also formally models aggregate equity returns in terms of aggregate equity OF, in an effort to clarify OF's importance in explaining returns for the Athens Exchange market. Almost a quarter of the daily returns in the FTSE/ATHEX20 index is explained by aggregate own OF. In a second step, using principal components and canonical correlation analyses, we document substantial common movements in returns, OFs, and liquidity, both on a market-wide basis and on an individual security basis. These results emphasize that asset pricing and liquidity cannot be analyzed in isolation from each other.