Research

26 pages, 951 KiB

Open AccessArticle

Modelling Volatile Time Series with V-Transforms and Copulas

by Alexander J. McNeil

Risks 2021, 9(1), 14; https://0-doi-org.brum.beds.ac.uk/10.3390/risks9010014 - 05 Jan 2021

Cited by 4 | Viewed by 3066

An approach to the modelling of volatile time series using a class of uniformity-preserving transforms for uniform random variables is proposed. V-transforms describe the relationship between quantiles of the stationary distribution of the time series and quantiles of the distribution of a predictable [...] Read more.

An approach to the modelling of volatile time series using a class of uniformity-preserving transforms for uniform random variables is proposed. V-transforms describe the relationship between quantiles of the stationary distribution of the time series and quantiles of the distribution of a predictable volatility proxy variable. They can be represented as copulas and permit the formulation and estimation of models that combine arbitrary marginal distributions with copula processes for the dynamics of the volatility proxy. The idea is illustrated using a Gaussian ARMA copula process and the resulting model is shown to replicate many of the stylized facts of financial return series and to facilitate the calculation of marginal and conditional characteristics of the model including quantile measures of risk. Estimation is carried out by adapting the exact maximum likelihood approach to the estimation of ARMA processes, and the model is shown to be competitive with standard GARCH in an empirical application to Bitcoin return data. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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27 pages, 854 KiB

Open AccessArticle

Pricing, Risk and Volatility in Subordinated Market Models

by Jean-Philippe Aguilar, Justin Lars Kirkby and Jan Korbel

Risks 2020, 8(4), 124; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8040124 - 17 Nov 2020

Cited by 9 | Viewed by 2918

Abstract

We consider several market models, where time is subordinated to a stochastic process. These models are based on various time changes in the Lévy processes driving asset returns, or on fractional extensions of the diffusion equation; they were introduced to capture complex phenomena [...] Read more.

We consider several market models, where time is subordinated to a stochastic process. These models are based on various time changes in the Lévy processes driving asset returns, or on fractional extensions of the diffusion equation; they were introduced to capture complex phenomena such as volatility clustering or long memory. After recalling recent results on option pricing in subordinated market models, we establish several analytical formulas for market sensitivities and portfolio performance in this class of models, and discuss some useful approximations when options are not far from the money. We also provide some tools for volatility modelling and delta hedging, as well as comparisons with numerical Fourier techniques. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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17 pages, 2005 KiB

Open AccessArticle

The Importance of Economic Variables on London Real Estate Market: A Random Forest Approach

by Susanna Levantesi and Gabriella Piscopo

Risks 2020, 8(4), 112; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8040112 - 21 Oct 2020

Cited by 28 | Viewed by 4749

Abstract

This paper follows the recent literature on real estate price prediction and proposes to take advantage of machine learning techniques to better explain which variables are more important in describing the real estate market evolution. We apply the random forest algorithm on London [...] Read more.

This paper follows the recent literature on real estate price prediction and proposes to take advantage of machine learning techniques to better explain which variables are more important in describing the real estate market evolution. We apply the random forest algorithm on London real estate data and analyze the local variables that influence the interaction between housing demand, supply and price. The variables choice is based on an urban point of view, where the main force driving the market is the interaction between local factors like population growth, net migration, new buildings and net supply. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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22 pages, 630 KiB

Open AccessArticle

Pricing with Variance Gamma Information

by Lane P. Hughston and Leandro Sánchez-Betancourt

Risks 2020, 8(4), 105; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8040105 - 10 Oct 2020

Cited by 2 | Viewed by 2007

Abstract

In the information-based pricing framework of Brody, Hughston & Macrina, the market filtration

{F_{t}}_{t \geq 0}

is generated by an information process

{ξ_{t}}_{t \geq 0}

defined in such a way that at some fixed time [...] Read more.

In the information-based pricing framework of Brody, Hughston & Macrina, the market filtration

{F_{t}}_{t \geq 0}

is generated by an information process

{ξ_{t}}_{t \geq 0}

defined in such a way that at some fixed time T an

F_{T}

-measurable random variable

X_{T}

is “revealed”. A cash flow

H_{T}

is taken to depend on the market factor

X_{T}

, and one considers the valuation of a financial asset that delivers

H_{T}

at time T. The value of the asset

S_{t}

at any time

t \in [0, T)

is the discounted conditional expectation of

H_{T}

with respect to

F_{t}

, where the expectation is under the risk neutral measure and the interest rate is constant. Then

S_{T^{-}} = H_{T}

, and

S_{t} = 0

for

t \geq T

. In the general situation one has a countable number of cash flows, and each cash flow can depend on a vector of market factors, each associated with an information process. In the present work we introduce a new process, which we call the normalized variance-gamma bridge. We show that the normalized variance-gamma bridge and the associated gamma bridge are jointly Markovian. From these processes, together with the specification of a market factor

X_{T}

, we construct a so-called variance-gamma information process. The filtration is then taken to be generated by the information process together with the gamma bridge. We show that the resulting extended information process has the Markov property and hence can be used to develop pricing models for a variety of different financial assets, several examples of which are discussed in detail. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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8 pages, 474 KiB

Open AccessCommunication

A Poisson Autoregressive Model to Understand COVID-19 Contagion Dynamics

by Arianna Agosto and Paolo Giudici

Risks 2020, 8(3), 77; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8030077 - 16 Jul 2020

Cited by 37 | Viewed by 5024

Abstract

We present a statistical model which can be employed to understand the contagion dynamics of the COVID-19, which can heavily impact health, economics and finance. The model is a Poisson autoregression of the daily new observed cases, and can reveal whether contagion has [...] Read more.

We present a statistical model which can be employed to understand the contagion dynamics of the COVID-19, which can heavily impact health, economics and finance. The model is a Poisson autoregression of the daily new observed cases, and can reveal whether contagion has a trend, and where is each country on that trend. Model results are exemplified from some observed series. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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17 pages, 2017 KiB

Open AccessArticle

Price Discovery and Market Reflexivity in Agricultural Futures Contracts with Different Maturities

by Steffen Volkenand, Günther Filler and Martin Odening

Risks 2020, 8(3), 75; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8030075 - 11 Jul 2020

Cited by 2 | Viewed by 3318

Abstract

The purpose of this paper is to analyze market reflexivity in agricultural futures contracts with different maturities. To this end, we apply a four-dimensional Hawkes model to storable and non-storable agricultural commodities. We find market reflexivity for both storable and non-storable commodities. Reflexivity [...] Read more.

The purpose of this paper is to analyze market reflexivity in agricultural futures contracts with different maturities. To this end, we apply a four-dimensional Hawkes model to storable and non-storable agricultural commodities. We find market reflexivity for both storable and non-storable commodities. Reflexivity accounts for about 50 to 70% of the total trading activity. Differences between nearby and deferred contracts are less pronounced for non-storable than for storable commodities. We conclude that the co-existence of exogenous and endogenous price dynamics does not change qualitative characteristics of the price discovery process that have been observed earlier without the consideration of market reflexivity. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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17 pages, 837 KiB

Open AccessFeature PaperArticle

Risk and Policy Uncertainty on Stock–Bond Return Correlations: Evidence from the US Markets

by Thomas C. Chiang

Risks 2020, 8(2), 58; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8020058 - 01 Jun 2020

Cited by 4 | Viewed by 3056

Abstract

This paper investigates dynamic correlations of stock–bond returns for different stock indices and bond maturities. Evidence in the US shows that stock–bond relations are time-varying and display a negative trend. The stock–bond correlations are negatively correlated with implied volatilities in stock and bond [...] Read more.

This paper investigates dynamic correlations of stock–bond returns for different stock indices and bond maturities. Evidence in the US shows that stock–bond relations are time-varying and display a negative trend. The stock–bond correlations are negatively correlated with implied volatilities in stock and bond markets. Tests show that stock–bond relations are positively correlated with economic policy uncertainty, however, are negatively correlated with the monetary policy and fiscal policy uncertainties. Correlation coefficients between stock and bond returns are positively related to total policy uncertainty for returns of the Dow-Jones Industrial Average (DJIA) and the S&P 500 Value stock index (VALUE), but negatively correlated with returns of S&P500 (Total market), the NASDAQ Composite Index (NASDAQ), and the RUSSELL 2000 (RUSSELL). Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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Graphical abstract

21 pages, 480 KiB

Open AccessArticle

How Do Health, Care Services Consumption and Lifestyle Factors Affect the Choice of Health Insurance Plans in Switzerland?

by Veronika Kalouguina and Joël Wagner

Risks 2020, 8(2), 41; https://0-doi-org.brum.beds.ac.uk/10.3390/risks8020041 - 27 Apr 2020

Cited by 2 | Viewed by 4092

Abstract

In compulsory health insurance in Switzerland, policyholders can choose two main features, the level of deductible and the type of plan. Deductibles can be chosen among six levels, which range from CHF 300 to 2500. While the coverage and benefits are identical, insurers [...] Read more.

In compulsory health insurance in Switzerland, policyholders can choose two main features, the level of deductible and the type of plan. Deductibles can be chosen among six levels, which range from CHF 300 to 2500. While the coverage and benefits are identical, insurers offer several plans where policyholders must first call a medical hotline, consult their family doctor, or visit a doctor from a defined network. The main benefit of higher deductibles and insurance plans with limitations is lower premiums. The insureds’ decisions to opt for a specific cover depend on observed and unobserved characteristics. The aim of this research is to understand the correlation between insurance plan choices and lifestyle through the state of health and medical care consumption in the setting of Swiss mandatory health insurance. To do so, we account for individual health and medical health care consumption as unobserved variables employing structural equation modeling. Our empirical analysis is based on data from the Swiss Health Survey wherein lifestyle factors like the body mass index, diet, physical activity, and commuting mode are available. From the 9301 recorded observations, we find a positive relationship between having a “healthy” lifestyle, a low consumption of doctors’ services, and choosing a high deductible, as well as an insurance plan with restrictions. Conversely, higher health care services’ usage triggers the choice of lower deductibles and standard insurance plans. Full article

(This article belongs to the Special Issue Risks: Feature Papers 2020)

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