Market anomalies and tactical asset allocation: Utilising market anomalies in multiple asset class portfolios with the Black−Litterman model

This thesis discusses the basic problem of the modern portfolio theory about how to optimise the perfect allocation for an investment portfolio. The theory provides a solution for an efficient portfolio, which minimises the risk of the portfolio with respect to the expected return. A central feature for all the portfolios on the efficient frontier is that the investor needs to provide the expected return for each asset. Market anomalies are persistent patterns seen in the financial markets, which cannot be explained with the current asset pricing theory. The goal of this thesis is to study whether these anomalies can be observed among different asset classes. Finally, if persistent patterns are found, it is investigated whether the anomalies hold valuable information for determining the expected returns used in the portfolio optimization Market anomalies and investment strategies based on them are studied with a rolling estimation window, where the return for the following period is always based on historical information. This is also crucial when rebalancing the portfolio. The anomalies investigated within this thesis are value, momentum, reversal, and idiosyncratic volatility. The research data includes price series of country level stock indices, government bonds, currencies, and commodities. The modern portfolio theory and the views given by the anomalies are combined by utilising the Black-Litterman model. This makes it possible to optimise the portfolio so that investor’s views are taken into account. When constructing the portfolios, the goal is to maximise the Sharpe ratio. Significance of the results is studied by assessing if the strategy yields excess returns in a relation to those explained by the threefactormodel. The most outstanding finding is that anomaly based factors include valuable information to enhance efficient portfolio diversification. When the highest Sharpe ratios for each asset class are picked from the test factors and applied to the Black−Litterman model, the final portfolio results in superior riskreturn combination. The highest Sharpe ratios are provided by momentum strategy for stocks and long-term reversal for the rest of the asset classes. Additionally, a strategy based on the value effect was highly appealing, and it basically performs as well as the previously mentioned Sharpe strategy. When studying the anomalies, it is found, that 12-month momentum is the strongest effect, especially for stock indices. In addition, a high idiosyncratic volatility seems to be positively correlated with country indices on stocks.

Multiple Public Goods and Lexicographic Preferences Replacement Principle.

We study the problem of locating two public goods for a group of agents with single-peaked preferences over an interval. An alternative specifies a location for each public good. In Miyagawa (1998), each agent consumes only his most preferred public good without rivalry. We extend preferences lexicographically and characterize the class of single-peaked preference rules by Pareto-optimality and replacement-domination. This result is considerably different from the corresponding characterization by Miyagawa (2001a).

Computation and Analysis of Multiple Structural-Change Models

In a recent paper, Bai and Perron (1998) considered theoretical issues related to the limiting distribution of estimators and test statistics in the linear model with multiple structural changes. In this companion paper, we consider practical issues for the empirical applications of the procedures. We first address the problem of estimation of the break dates and present an efficient algorithm to obtain global minimizers of the sum of squared residuals. This algorithm is based on the principle of dynamic programming and requires at most least-squares operations of order O(T 2) for any number of breaks. Our method can be applied to both pure and partial structural-change models. Secondly, we consider the problem of forming confidence intervals for the break dates under various hypotheses about the structure of the data and the errors across segments. Third, we address the issue of testing for structural changes under very general conditions on the data and the errors. Fourth, we address the issue of estimating the number of breaks. We present simulation results pertaining to the behavior of the estimators and tests in finite samples. Finally, a few empirical applications are presented to illustrate the usefulness of the procedures. All methods discussed are implemented in a GAUSS program available upon request for non-profit academic use.

Quadratic M-Estimators for ARCH-Type Processes

This paper addresses the issue of estimating semiparametric time series models specified by their conditional mean and conditional variance. We stress the importance of using joint restrictions on the mean and variance. This leads us to take into account the covariance between the mean and the variance and the variance of the variance, that is, the skewness and kurtosis. We establish the direct links between the usual parametric estimation methods, namely, the QMLE, the GMM and the M-estimation. The ususal univariate QMLE is, under non-normality, less efficient than the optimal GMM estimator. However, the bivariate QMLE based on the dependent variable and its square is as efficient as the optimal GMM one. A Monte Carlo analysis confirms the relevance of our approach, in particular, the importance of skewness.

Equal Factor Equivalence in Economies with Multiple Public Goods.

We consider the problem of provisioon and cost-sharing of multiple public goods. the efficient equal factor equivalent allocation rule makes every agent indifferent between what he receives and the opportunity of choosing the bundle of public goods subject to the constraint of paying r times its cost, where r is set as low as possible.

On Complexity of Lobbying in Multiple Referenda

In this paper we show that lobbying in conditions of “direct democracy” is virtually impossible, even in conditions of complete information about voters preferences, since it would require solving a very computationally hard problem. We use the apparatus of parametrized complexity for this purpose.

Priorities in the Location of Multiple Public Facilities

A collective decision problem is described by a set of agents, a profile of single-peaked preferences over the real line and a number k of public facilities to be located. We consider public facilities that do not su¤er from congestion and are non-excludable. We provide a characterization of the class of rules satisfying Pareto-efficiency, object-population monotonicity and sovereignty. Each rule in the class is a priority rule that selects locations according to a predetermined priority ordering among interest groups. We characterize each of the subclasses of priority rules that respectively satisfy anonymity, hiding-proofness and strategy-proofness. In particular, we prove that a priority rule is strategy-proof if and only if it partitions the set of agents into a fixed hierarchy. Alternatively, any such rule can be viewed as a collection of fixed-populations generalized peak-selection median rules (Moulin, 1980), that are linked across populations, in a way that we describe.

Models and algorithms for the capacitated location-routing problem

Le problème de localisation-routage avec capacités (PLRC) apparaît comme un problème clé dans la conception de réseaux de distribution de marchandises. Il généralisele problème de localisation avec capacités (PLC) ainsi que le problème de tournées de véhicules à multiples dépôts (PTVMD), le premier en ajoutant des décisions liées au routage et le deuxième en ajoutant des décisions liées à la localisation des dépôts. Dans cette thèse on dévelope des outils pour résoudre le PLRC à l’aide de la programmation mathématique. Dans le chapitre 3, on introduit trois nouveaux modèles pour le PLRC basés sur des flots de véhicules et des flots de commodités, et on montre comment ceux-ci dominent, en termes de la qualité de la borne inférieure, la formulation originale à deux indices [19]. Des nouvelles inégalités valides ont été dévelopées et ajoutées aux modèles, de même que des inégalités connues. De nouveaux algorithmes de séparation ont aussi été dévelopés qui dans la plupart de cas généralisent ceux trouvés dans la litterature. Les résultats numériques montrent que ces modèles de flot sont en fait utiles pour résoudre des instances de petite à moyenne taille. Dans le chapitre 4, on présente une nouvelle méthode de génération de colonnes basée sur une formulation de partition d’ensemble. Le sous-problème consiste en un problème de plus court chemin avec capacités (PCCC). En particulier, on utilise une relaxation de ce problème dans laquelle il est possible de produire des routes avec des cycles de longueur trois ou plus. Ceci est complété par des nouvelles coupes qui permettent de réduire encore davantage le saut d’intégralité en même temps que de défavoriser l’apparition de cycles dans les routes. Ces résultats suggèrent que cette méthode fournit la meilleure méthode exacte pour le PLRC. Dans le chapitre 5, on introduit une nouvelle méthode heuristique pour le PLRC. Premièrement, on démarre une méthode randomisée de type GRASP pour trouver un premier ensemble de solutions de bonne qualité. Les solutions de cet ensemble sont alors combinées de façon à les améliorer. Finalement, on démarre une méthode de type détruir et réparer basée sur la résolution d’un nouveau modèle de localisation et réaffectation qui généralise le problème de réaffectaction [48].

Nonlinear Dynamics of Multiple Quantum Well Lasers: Chaos and Multistability

This thesis presents analytical and numerical results from studies based on the multiple quantum well laser rate equation model. We address the problem of controlling chaos produced by direct modulation of laser diodes. We consider the delay feedback control methods for this purpose and study their performance using numerical simulation. Besides the control of chaos, control of other nonlinear effects such as quasiperiodicity and bistability using delay feedback methods are also investigated.A number of secure communication schemes based on synchronization of chaos semiconductor lasers have been successfully demonstrated theoretically and experimentally. The current investigations in these field include the study of practical issues on the implementations of such encryption schemes. We theoretically study the issues such as channel delay, phase mismatch and frequency detuning on the synchronization of chaos in directly modulated laser diodes. It would be helpful for designing and implementing chaotic encryption schemes using synchronization of chaos in modulated semiconductor lasers.

Data Security in Fault Tolerant Hard Real Time Systems- Use of Time Dependant Multiple Random Cipher Code

The present research problem is to study the existing encryption methods and to develop a new technique which is performance wise superior to other existing techniques and at the same time can be very well incorporated in the communication channels of Fault Tolerant Hard Real time systems along with existing Error Checking / Error Correcting codes, so that the intention of eaves dropping can be defeated. There are many encryption methods available now. Each method has got it's own merits and demerits. Similarly, many crypt analysis techniques which adversaries use are also available.

Reinforcement Learning approaches to Economic Dispatch problem

This paper presents Reinforcement Learning (RL) approaches to Economic Dispatch problem. In this paper, formulation of Economic Dispatch as a multi stage decision making problem is carried out, then two variants of RL algorithms are presented. A third algorithm which takes into consideration the transmission losses is also explained. Efficiency and flexibility of the proposed algorithms are demonstrated through different representative systems: a three generator system with given generation cost table, IEEE 30 bus system with quadratic cost functions, 10 generator system having piecewise quadratic cost functions and a 20 generator system considering transmission losses. A comparison of the computation times of different algorithms is also carried out.

Quadratic Predictor based Differential Encoding and Decoding of Speech Signals

Modeling nonlinear systems using Volterra series is a century old method but practical realizations were hampered by inadequate hardware to handle the increased computational complexity stemming from its use. But interest is renewed recently, in designing and implementing filters which can model much of the polynomial nonlinearities inherent in practical systems. The key advantage in resorting to Volterra power series for this purpose is that nonlinear filters so designed can be made to work in parallel with the existing LTI systems, yielding improved performance. This paper describes the inclusion of a quadratic predictor (with nonlinearity order 2) with a linear predictor in an analog source coding system. Analog coding schemes generally ignore the source generation mechanisms but focuses on high fidelity reconstruction at the receiver. The widely used method of differential pnlse code modulation (DPCM) for speech transmission uses a linear predictor to estimate the next possible value of the input speech signal. But this linear system do not account for the inherent nonlinearities in speech signals arising out of multiple reflections in the vocal tract. So a quadratic predictor is designed and implemented in parallel with the linear predictor to yield improved mean square error performance. The augmented speech coder is tested on speech signals transmitted over an additive white gaussian noise (AWGN) channel.

Design, Development and Realization of Quadratic Volterra Filters for Selected Applications

The basic concepts of digital signal processing are taught to the students in engineering and science. The focus of the course is on linear, time invariant systems. The question as to what happens when the system is governed by a quadratic or cubic equation remains unanswered in the vast majority of literature on signal processing. Light has been shed on this problem when John V Mathews and Giovanni L Sicuranza published the book Polynomial Signal Processing. This book opened up an unseen vista of polynomial systems for signal and image processing. The book presented the theory and implementations of both adaptive and non-adaptive FIR and IIR quadratic systems which offer improved performance than conventional linear systems. The theory of quadratic systems presents a pristine and virgin area of research that offers computationally intensive work. Once the area of research is selected, the next issue is the choice of the software tool to carry out the work. Conventional languages like C and C++ are easily eliminated as they are not interpreted and lack good quality plotting libraries. MATLAB is proved to be very slow and so do SCILAB and Octave. The search for a language for scientific computing that was as fast as C, but with a good quality plotting library, ended up in Python, a distant relative of LISP. It proved to be ideal for scientific computing. An account of the use of Python, its scientific computing package scipy and the plotting library pylab is given in the appendix Initially, work is focused on designing predictors that exploit the polynomial nonlinearities inherent in speech generation mechanisms. Soon, the work got diverted into medical image processing which offered more potential to exploit by the use of quadratic methods. The major focus in this area is on quadratic edge detection methods for retinal images and fingerprints as well as de-noising raw MRI signals

Sparse Representations of Multiple Signals

We discuss the problem of finding sparse representations of a class of signals. We formalize the problem and prove it is NP-complete both in the case of a single signal and that of multiple ones. Next we develop a simple approximation method to the problem and we show experimental results using artificially generated signals. Furthermore,we use our approximation method to find sparse representations of classes of real signals, specifically of images of pedestrians. We discuss the relation between our formulation of the sparsity problem and the problem of finding representations of objects that are compact and appropriate for detection and classification.

Planning and Scheduling Decisions in Supply Chains with Multiple Supply Modes: An Integrated Approach

We address the problem of jointly determining shipment planning and scheduling decisions with the presence of multiple shipment modes. We consider long lead time, less expensive sea shipment mode, and short lead time but expensive air shipment modes. Existing research on multiple shipment modes largely address the short term scheduling decisions only. Motivated by an industrial problem where planning decisions are independent of the scheduling decisions, we investigate the benefits of integrating the two sets of decisions. We develop sequence of mathematical models to address the planning and scheduling decisions. Preliminary computational results indicate improved performance of the integrated approach over some of the existing policies used in real-life situations.