Forecasting financial asset price movements using convolutional neutral networks – application to the U.S. financial services sector and comparisson across industries

This thesis explores the applicability of CNNs as a price movement forecasting tool for ETFs, using a technical analysis approach and three different image encoding techniques. After developing a general methodology, the thesis focuses on the application to the U.S. financial services sector. Subsequently, the research draws comparisons to results obtained for other U.S. sector ETFs using the same model approach. Overall results show that the CNN models, while proving some potential and exceeding a random model in accuracy, show significant weaknesses for all industries in predicting Buy and Sell signals. Addressing these weaknesses, limitations of the approach are explored to suggest methods for model performance improvements

Quantifying the effects of new derivative introduction on exchange volatility, efficiency and liquidity

This thesis investigates the effects of the introduction of new financial derivative products on exchange volatility, efficiency and liquidity. The derivatives under primary investigation are Exchange Traded Funds (ETFs) and Contracts for Difference (CFDs). These products offer a cheap, tax-efficient and speedy method for increasing or decreasing market exposure to price changes in the related primary asset. By facilitating faster and shorter-term trading, these products may increase market liquidity and/or increase market volatility for the related primary asset. The thesis builds a cross-country database of new-derivative-markets opening dates, and investigates the key features of prices and returns for related primary assets before and after the opening of these derivative markets. The database covers 16 countries in the CFD investigation, 21 commodity markets in the ETF investigation, and related data as available (daily closing prices, trading volumes, bid-ask quotes) in each of them. The key price and return features investigated include bid-ask spreads, trading volumes (both of derivatives and related primary assets), and daily return autocorrelation, variance, skewness and kurtosis. This thesis also considers a separate, but related, research problem. It extends and empirically applies a liquidity-indicator model for the Eurozone created by the Bank of England (BOE) and developed further by the European Central Bank (ECB) by including commodity liquidity, and uses this extended model to investigate shifting investor behaviour based on changing market dynamics. Similar to the investigation of the CDF and EFT markets, this investigation is concerned with market stability and liquidity in a changed environment (in this case, the key change is the introduction of the euro currency). Chapter one contains an introduction to the main hypotheses regarding the effects of the introduction of new derivatives on securities markets, and the empirical methods used to test these hypotheses. This chapter also describes the two investment products which are the main focus, CFDs and ETFs, and their particular potential impacts on market-specific characteristics such as volatility, efficiency and liquidity. Chapter two empirically investigates the impact of CFDs on market liquidity and volatility. CFDs have existed for less than twenty years and the CFD market grew rapidly prior to the recent international financial crisis. This chapter empirically examines the roles that CFDs have played, either as an accelerant for mispricing in international equity markets away from fundamental values, or as a source of increased market efficiency through the addition of new liquidity. This chapter uses GARCH and EGARCH models to test for the impact of CFDs on the return volatility and autocorrelation of the underlying security. In the case of Australia, the analysis is applied to individual securities. In the other 15 countries investigated in this chapter, the analysis is applied at the level of the market index. The chapter also investigates whether the stylised characteristics of CFDs are more or less pronounced in low liquidity exchanges. This chapter finds that CFDs appear to have influenced asset-specific variance and return autocorrelation. Some tentative explanations for these findings are offered. The presence of bid and ask-price ‘overhangs’ associated with CFD trading cannot be rejected and may be associated with observed volatility reductions in some jurisdictions. Following the analysis based on CFDs in chapter two, ETFs are the primary focus of chapter three. ETFs have existed since the late 1980s, but were first traded on commodity markets in the early 2000s. Their inception has been linked by some market analysts with the large growth in commodity market volatility seen in recent years. This chapter directly tests this link. The chapter also investigates whether the stylised characteristics of ETFs are more or less pronounced in larger commodity markets than in smaller markets. The results indicate that larger ETFs in terms of their assets under management at their dates of inception, are associated with higher volatility. Smaller commodity markets are found to have increased efficiency after the introduction of ETFs, indicating that there are some benefits from new ETF investment in markets below $4 to$5 billion in size, but the associated caveat is that of increased volatility, indicative of potential pitfalls in the ETF portfolio rebalancing process. It appears that ETFs have made commodity markets more efficient through a new influx of trading counterparties, but they appear to be associated with a cost. The need for regulation of investment size and market ownership limits therefore cannot be rejected. Chapters two and three look at two particular new instruments and their effects on liquidity and volatility. Another major innovation in market structure was the advent of the euro currency in January 1999. The power and presence of a financially-combined Europe attracted new international investment, therefore influencing liquidity. The combination of this influx of investors and new products (including CFDs and ETFs) can potentially have wide market impacts. Understanding the structural changes of liquidity in Europe in recent years is important for macroprudential risk assessment, as sudden changes in conditions may be indicative of current stress and a signal of future stress. Chapter four presents a Europeanspecific liquidity measure used by several central banks, and provides some new modifications to this measure. The measure is constructed by combining several facets of liquidity and depth measurement across several asset markets. It attempts to incorporate aspects such as market tightness, depth and resiliency. The flows and the direction of causality can also be inferred using vector autoregression, Granger causality techniques and impulse response functions. The measure uses a combination of liquidity determinants including the bid-ask spread, the return to volume ratio and numerous measures of liquidity premia. In the chapter, the modified liquidity measure is applied empirically to European-area data

Quantifying the effects of new derivative introduction on exchange volatility, efficiency and liquidity

This thesis investigates the effects of the introduction of new financial derivative products on exchange volatility, efficiency and liquidity. The derivatives under primary investigation are Exchange Traded Funds (ETFs) and Contracts for Difference (CFDs). These products offer a cheap, tax-efficient and speedy method for increasing or decreasing market exposure to price changes in the related primary asset. By facilitating faster and shorter-term trading, these products may increase market liquidity and/or increase market volatility for the related primary asset. The thesis builds a cross-country database of new-derivative-markets opening dates, and investigates the key features of prices and returns for related primary assets before and after the opening of these derivative markets. The database covers 16 countries in the CFD investigation, 21 commodity markets in the ETF investigation, and related data as available (daily closing prices, trading volumes, bid-ask quotes) in each of them. The key price and return features investigated include bid-ask spreads, trading volumes (both of derivatives and related primary assets), and daily return autocorrelation, variance, skewness and kurtosis. This thesis also considers a separate, but related, research problem. It extends and empirically applies a liquidity-indicator model for the Eurozone created by the Bank of England (BOE) and developed further by the European Central Bank (ECB) by including commodity liquidity, and uses this extended model to investigate shifting investor behaviour based on changing market dynamics. Similar to the investigation of the CDF and EFT markets, this investigation is concerned with market stability and liquidity in a changed environment (in this case, the key change is the introduction of the euro currency). Chapter one contains an introduction to the main hypotheses regarding the effects of the introduction of new derivatives on securities markets, and the empirical methods used to test these hypotheses. This chapter also describes the two investment products which are the main focus, CFDs and ETFs, and their particular potential impacts on market-specific characteristics such as volatility, efficiency and liquidity. Chapter two empirically investigates the impact of CFDs on market liquidity and volatility. CFDs have existed for less than twenty years and the CFD market grew rapidly prior to the recent international financial crisis. This chapter empirically examines the roles that CFDs have played, either as an accelerant for mispricing in international equity markets away from fundamental values, or as a source of increased market efficiency through the addition of new liquidity. This chapter uses GARCH and EGARCH models to test for the impact of CFDs on the return volatility and autocorrelation of the underlying security. In the case of Australia, the analysis is applied to individual securities. In the other 15 countries investigated in this chapter, the analysis is applied at the level of the market index. The chapter also investigates whether the stylised characteristics of CFDs are more or less pronounced in low liquidity exchanges. This chapter finds that CFDs appear to have influenced asset-specific variance and return autocorrelation. Some tentative explanations for these findings are offered. The presence of bid and ask-price ‘overhangs’ associated with CFD trading cannot be rejected and may be associated with observed volatility reductions in some jurisdictions. Following the analysis based on CFDs in chapter two, ETFs are the primary focus of chapter three. ETFs have existed since the late 1980s, but were first traded on commodity markets in the early 2000s. Their inception has been linked by some market analysts with the large growth in commodity market volatility seen in recent years. This chapter directly tests this link. The chapter also investigates whether the stylised characteristics of ETFs are more or less pronounced in larger commodity markets than in smaller markets. The results indicate that larger ETFs in terms of their assets under management at their dates of inception, are associated with higher volatility. Smaller commodity markets are found to have increased efficiency after the introduction of ETFs, indicating that there are some benefits from new ETF investment in markets below $4 to$5 billion in size, but the associated caveat is that of increased volatility, indicative of potential pitfalls in the ETF portfolio rebalancing process. It appears that ETFs have made commodity markets more efficient through a new influx of trading counterparties, but they appear to be associated with a cost. The need for regulation of investment size and market ownership limits therefore cannot be rejected. Chapters two and three look at two particular new instruments and their effects on liquidity and volatility. Another major innovation in market structure was the advent of the euro currency in January 1999. The power and presence of a financially-combined Europe attracted new international investment, therefore influencing liquidity. The combination of this influx of investors and new products (including CFDs and ETFs) can potentially have wide market impacts. Understanding the structural changes of liquidity in Europe in recent years is important for macroprudential risk assessment, as sudden changes in conditions may be indicative of current stress and a signal of future stress. Chapter four presents a Europeanspecific liquidity measure used by several central banks, and provides some new modifications to this measure. The measure is constructed by combining several facets of liquidity and depth measurement across several asset markets. It attempts to incorporate aspects such as market tightness, depth and resiliency. The flows and the direction of causality can also be inferred using vector autoregression, Granger causality techniques and impulse response functions. The measure uses a combination of liquidity determinants including the bid-ask spread, the return to volume ratio and numerous measures of liquidity premia. In the chapter, the modified liquidity measure is applied empirically to European-area data

The potential for exchange-traded futures on recycled materials to improve recycling efficiency

Recycling has substantial environmental and economic benefits, but the recycling industry is relatively inefficient. Approximately half of all recyclable material is not actually recycled, and this inefficiency is economically and environmentally costly. This paper investigates the potential for exchange-traded futures on recycled materials to increase efficiency for the recycling industry by improving the market quality for firms that buy and sell recycled materials. The aim of this study is to statistically analyze a novel data set of prices for recycled materials to demonstrate the potential efficiency gains to introducing exchange-traded futures on recycled materials. The theoretical basis for this financial innovation is numerous previous studies showing that introducing exchange-traded derivatives improves the market quality of the underlying asset. The results of the analysis show that price volatility of recycled materials is generally high, with monthly standard deviation greater than 6%. Price volatility of recycled materials is excessive compared to price volatility of analogous new materials. Also, stock price volatility of waste management firms is positively related to price volatility in recycled materials. Price volatility of recycled materials explains 12% of the excess stock price volatility for waste management firms. This paper includes a practical discussion of proposed specifications and standards for these new financial contracts and plans for further research studies. Along with previous studies on the listing of exchange-traded derivatives, the conclusion of the statistical analysis is that there are large potential economic and environmental benefits to listing exchange-traded futures on recycled materials

Worldwide Evidences in the Relationships between Agriculture, Energy and Water Sectors

Water, food and energy (WFE) are strongly interconnected: each depends on the other for a lot of concerns, spanning from guaranteeing access to services, to environmental, social and ethical impact issues, to price relations.The development, use, and waste generated by demand for these resources drive global changes and fears of resource scarcity. To date, a new approach to the concept of sustainable development is emerging and a joint analysis of these three areas is needed. “Demand for water, food and energy is expected to rise by 30-50% in the next two decades, while economic disparities incentivize short-term responses in production and consumption that undermine long-term sustainability. Shortages could cause social and political instability, geopolitical conflict and irreparable environmental damages. Any strategy that focuses on one part of the WFE relationships without considering its interconnections risks serious unintended consequences” (World Economic Forum, 2011).In the last years international organizations have organized several conferences to raise awareness of the WFE nexus (IISD 2011, footnote p.6) and some studies have addressed this issue trying to provide a theoretical integrated view aimed at understanding how to tackle these complex relationships when identifying policies and actions (Brazilian et al. 2011, Elobeid et al. 2013, Howells et al. 2013). These studies have analyzed the technical connection that exists between the three elements in order to highlight the need for joint policy designed to ensure a sustainable development. From an economic point of view, there are still very few analysis that utilize empirical approaches to support recent theoretical literature (Peterson et al. 2014, Curmi et al. 2013).This area is clearly massive and an economic analysis of the link aimed at understanding the interactions and correlations on a global scale is still needed. Such an analysis can be conducted using price relationships

Two Essays on Oil Futures Markets

The first chapter of this dissertation estimates the relative contributions of two major exchanges on crude oil futures to the price discovery process-- Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE), using trade-by-trade data in 2008. The study also empirically analyzes the effects of trading characteristics on the information share of these two markets. Trading characteristics examined in the study include trading volume, trade size, and trading costs. On average, CME is characterized by greater volume and trade size but also slightly greater bid-ask spread. CME leads the process of price discovery and this leadership is caused by relative trade size and volatility before the financial crisis of 2008; however post-crisis period this leadership is caused by trading volume. Moreover, this study presents evidence that, in times of large uncertainty in the market, the market maker charges a greater bid-ask spread for the more informative market. The second chapter examines the influence of expected oil price volatility, the behavior of the Organization of Petroleum Exporting Countries (OPEC), and the US Dollar exchange rate volatility on the backwardation of crude oil futures during the period from January 1986 to December 2008. The results indicate that oil futures are strongly and weakly backwardated 57% and 69% of the time, respectively. The regression analysis of weak backwardation shows that oil volatility, OPEC overproduction (difference between quota and the actual production), and the volatility of the US Dollar against the Japanese Yen have a positive significant effect on oil backwardation, while OPEC production quota imposed on its members has a negative significant effect on oil backwardation. However the volatility of US Dollar against the British Pound has no significant effect on oil backwardation. The regression analysis of strong backwardation produces qualitatively the same results except that volatility has no effect. In a sub-period analysis, evidence also indicates that trading volume of oil funds and backwardation are negatively related, suggesting that oil funds increase the demand of futures relative to that of spot

The Southern Engine of Growth and Hard Commodity Prices : Does China Lead to Disruptive Development

The 2003 to 2008 commodity boom was the longest period of rising commodity prices seen since the Second World War. The main drivers of base metal prices were increasing Demand from China, Inflexible Supply from within the Global Mining Industry and the increased participation of Financial Actors in commodity markets.This research examines the role of the main drivers in the 2003 to 2008 commodity boom,and their impact on the future behaviour of hard-commodity prices. The persistence of these drivers,despite the interruption due to the financial crisis towards the end of 2008, leads us to conclude that the Boom is the start of an expansionary phase of a commodity Super Cycle.China's increase in base-metals consumption has directly led to demand disruptions in the global commodity markets. Indirectly, it has affected the global mining sector and influenced a change in perception of financial actors. China's growth has been a disruptive element in traditional commodity price behaviour.Given the commodity pessimism since the 1950s, the current rise in commodity prices has implications for development policy. The orthodoxy of deteriorating terms of trade of commodities relative to manufactures, price volatility, the low income elasticity of demand and the nature of the global mining industry, are all challenged by the rising trend in commodity prices.Hard-commodity-exporting countries have an opportunity to benefit from the current and expected growth of commodity prices in the medium term. For base-metal ore abundant countries,commodity optimism may well define the next fifty years of global economic development