Volatility forecasting

Volatility has been one of the most active and successful areas of research in time series econometrics and economic forecasting in recent decades. This chapter provides a selective survey of the most important theoretical developments and empirical insights to emerge from this burgeoning literature, with a distinct focus on forecasting applications. Volatility is inherently latent, and Section 1 begins with a brief intuitive account of various key volatility concepts. Section 2 then discusses a series of different economic situations in which volatility plays a crucial role, ranging from the use of volatility forecasts in portfolio allocation to density forecasting in risk management. Sections 3, 4 and 5 present a variety of alternative procedures for univariate volatility modeling and forecasting based on the GARCH, stochastic volatility and realized volatility paradigms, respectively. Section 6 extends the discussion to the multivariate problem of forecasting conditional covariances and correlations, and Section 7 discusses volatility forecast evaluation methods in both univariate and multivariate cases. Section 8 concludes briefly. JEL Klassifikation: C10, C53, G1

Volatility Forecasting

Volatility has been one of the most active and successful areas of research in time series econometrics and economic forecasting in recent decades. This chapter provides a selective survey of the most important theoretical developments and empirical insights to emerge from this burgeoning literature, with a distinct focus on forecasting applications. Volatility is inherently latent, and Section 1 begins with a brief intuitive account of various key volatility concepts. Section 2 then discusses a series of different economic situations in which volatility plays a crucial role, ranging from the use of volatility forecasts in portfolio allocation to density forecasting in risk management. Sections 3, 4 and 5 present a variety of alternative procedures for univariate volatility modeling and forecasting based on the GARCH, stochastic volatility and realized volatility paradigms, respectively. Section 6 extends the discussion to the multivariate problem of forecasting conditional covariances and correlations, and Section 7 discusses volatility forecast evaluation methods in both univariate and multivariate cases. Section 8 concludes briefly.

Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks

This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.

Long-Term Prediction for T1DM Model During State-Feedback Control

Avoiding low glucose concentration is critically important in type-1 diabetes treatment. Predicting the future plasma glucose levels could ensure the safety of the patient. However, such estimation is no trivial task. The current paper proposes a predictor framework which stems from Unscented Kalman filter and works during closed-loop control, that can predict hazardous glucose levels in advance. Once the blood glucose concentration starts to rise, the predictor activates and estimates future glucose levels up to 3 hours, confirming whether the controller can endanger the patient. The capabilities of the framework is presented through simulations based on the SimEdu validated in-silico simulator

Estimation of regulatory credit risk models

Incluye bibliografíaThis article estimates a general credit risk model with both macroeconomic and latent credit factors for Spanish banks during the period 2004-2010. The proposed framework allows to estimate with bank level data both the standard credit risk model of Basel II and generalized models. I find evidence of persistence in the credit latent factor and of a significant effect of GDP growth and interbank rates on loan default rates. The estimated default correlation is low across specifications. The model is also used to calculate the impact on the probabilities of default of stressed economic scenariosEste artículo estima un modelo general de riesgo de crédito que incluye tanto factores macroeconómicos como factores de crédito latentes para los bancos españoles durante el período 2004-2010. El marco propuesto permite la estimación con datos de bancos individuales tanto del modelo de crédito estándar de Basilea II como de modelos más generales. Se encuentra evidencia de un factor de crédito latente persistente y de un efecto significativo del crecimiento del PIB y de los tipos de préstamo interbancarios en la tasa de impago. La estimación de la correlación entre impagos es baja para las distintas especificaciones, lo que indica una relación positiva entre concentración bancaria y estabilidad financiera. Se utiliza el modelo para calcular el impacto en las probabilidades de impago de distintos escenarios económicos estresado

Business Cycles in Economics

The business cycles are generated by the oscillating macro-/micro-/nano- economic output variables in the economy of the scale and the scope in the amplitude/frequency/phase/time domains in the economics. The accurate forward looking assumptions on the business cycles oscillation dynamics can optimize the financial capital investing and/or borrowing by the economic agents in the capital markets. The book's main objective is to study the business cycles in the economy of the scale and the scope, formulating the Ledenyov unified business cycles theory in the Ledenyov classic and quantum econodynamics

An extended generalized Markov model for the spread risk and its calibration by using filtering techniques in Solvency II framework

The Solvency II regulatory regime requires the calculation of a capital requirement, the Solvency Capital Requirement (SCR), for the insurance and reinsurance companies, that is based on a market-consistent evaluation of the Basic Own Funds probability distribution forecast over a one-year time horizon. This work proposes an extended generalized Markov model for rating-based pricing of risky securities for spread risk assessment and management within the Solvency II framework, under an internal model or partial internal model. This model is based on Jarrow, Lando and Turnbull (1997), Lando (1998) and Gambaro et al. (2018) and models the credit rating transitions and the default process using an extension of a time-homogeneous Markov chain and two subordinator processes. This approach allows simultaneous modeling of credit spreads for different rating classes and credit spreads to fluctuate randomly even when the rating does not change. The estimation methodologies used in this work are consistent with the scope of the work and the scope of the proposed model, i.e., pricing of defaultable bonds and calculation of SCR for the spread risk sub-module, and with the market-consistency principle required by Solvency II. For this purpose, estimation techniques on time series known as filtering techniques are used, which allow the model parameters to be jointly estimated under both the real-world probability measure (necessary for risk assessment) and the risk-neutral probability measure (necessary for pricing). Specifically, an appropriate set of time series of credit spread term structures, differentiated by economic sector and rating class, is used. The proposed model, in its final version, returns excellent results in terms of goodness of fit to historical data, and the projected data are consistent with historical data and the Solvency II framework. The filtering techniques, in the different configurations used in this work (particle filtering with Gauss-Legendre quadrature techniques, particle filtering with Sequential Importance Resampling algorithm, Kalman filter), were found to be an effective and flexible tool for estimating the models proposed, able to handle the high computational complexity of the problem addressed

Financial Instability and Credit Constraint: Evidence from the Cost of Bank Financing

This paper examines the relation between the degree of firms’ financial constraint and the observed rise in the cost of bank financing during the global financial crisis of 2008. It introduces a new measure of financial constraint: the lending rate paid by each firm on working capital loans. In line with previous research, the findings point to a more severe contraction in credit supply for more credit constrained firms. Additionally, the results show that the existence of collateral and a large portfolio of lenders mitigate the credit supply contraction observed in that period.

Machine Learning based Wind Power Forecasting for Operational Decision Support

To utilize renewable energy efficiently to meet the needs of mankind's living demands becomes an extremely hot topic since global warming is the most serious global environmental problem that human beings are facing today. Burning of fossil fuels, such as coal and oil directly for generating electricity leads to environment pollution and exacerbates global warning. However, large-scale development of hydropower increases greenhouse gas emissions and greenhouse effects. This research is related to knowledge of wind power forecasting (WPF) and machine learning (ML). This research is built around one central research question: How to improve the accuracy of WPF by using AI methods? A pilot conceptual system combining meteorological information and operations management has been formulated. The main contribution is visualized in a proposed new framework, named Meteorological Information Service Decision Support System, consisting of a meteorological information module, wind power prediction module and operations management module. This conceptual framework has been verified by quantitative analysis in empirical cases. This system utilizes meteorological information for decision-making based on condition-based maintenance in operations and management for the purpose of optimizing energy management. It aims to analyze and predict the variation of wind power for the next day or the following week to develop scheduling planning services for WPEs based on predicting wind speed for every six hours, which is short-term wind speed prediction, through training, validating, and testing dataset. Accurate prediction of wind speed is crucial for weather forecasting service and WPF. This study presents a carefully designed wind speed prediction model which combines fully-connected neural network (FCNN), long short-term memory (LSTM) algorithm with eXtreme Gradient Boosting (XGBoost) technique, to predict wind speed. The performance of each model is tested by using reanalysis data from European Center for Medium-Range Weather Forecasts (ECMWF) for Meteorological observatory located in Vaasa in Finland. The results show that XGBoost algorithm has similar improved prediction performance as LSTM algorithm, in terms of RMSE, MAE and R2 compared to the commonly used traditional FCNN model. On the other hand, the XGBoost algorithm has a significant advantage on training time while comparing to the other algorithms in this case study. Additionally, this sensitivity analysis indicates great potential of the optimized deep learning (DL) method, which is a subset of machine learning (ML), in improving local weather forecast on the coding platform of Python. The results indicate that, by using Meteorological Information Service Decision Support System, it is possible to support effective decision-making and create timely actions within the WPEs. Findings from this research contribute to WPF in WPEs. The main contribution of this research is achieving decision optimization on a decision support system by using ML. It was concluded that the proposed system is very promising for potential applications in wind (power) energy management