A comparison of fuzzy regression methods for the estimation of the implied volatility smile function

The information content of option prices on the underlying asset has a special importance in finance. In particular, with the use of option implied trees, market participants may price other derivatives, estimate and forecast volatility (see e.g. the volatility index VIX), or higher moments of the underlying asset distribution. A crucial input of option implied trees is the estimation of the smile (implied volatility as a function of the strike price), which boils down to fitting a function to a limited number of existing knots. However, standard techniques require a one-to-one mapping between volatility and strike price, which is not met in the reality of financial markets, where, to a given strike price, two different implied volatilities are usually associated (coming from different types of options: call and put). In this paper we compare the widely used methodology of discarding some implied volatilities and interpolating the remaining knots with cubic splines, to a fuzzy regression approach which does not require an a-priori choice of implied volatilities. To this end, we first extend some linear fuzzy regression methods to a polynomial form and we apply them to the financial problem. The fuzzy regression methods used range from the possibilistic regression method of Tanaka, Uejima and Asai [14], the least squares fuzzy regression method of Savic and Pedrycz [13] and the hybrid method of Ishibuchi and Nii [4]

Towards a skewness index for the Italian stock market

The present paper is a first attempt of computing a skewness index for the Italian stock market. We compare and contrast different measures of asymmetry of the distribution: an index computed with the CBOE SKEW index formula and two other asymmetry indexes, the SIX indexes, as proposed in Faff and Liu (2014). We analyze the properties of the skewness indexes, by investigating their relationship with model-free implied volatility and the returns on the underlying stock index. Moreover, we assess the profitability of skewness trades and disentangle the contribution of the left and the right part of the risk neutral distribution to the profitability of the latter strategies. The data set consists of FTSE MIB index options data and covers the years 2011-2014, allowing us to address the behavior of skewness measures both in bullish and bearish market periods. We find that the Italian SKEW index presents many advantages with respect to other asymmetry measures: it has a significant contemporaneous relation with both returns, model-free implied volatility and has explanatory power on returns, after controlling for volatility. We find a negative relation between volatility changes and changes in the Italian SKEW index: an increase in model-free implied volatility is associated with a decrease in the Italian SKEW index. Moreover, the SKEW index acts as a measure of market greed, since returns react more negatively to a decrease in the SKEW index (increase in risk neutral skewness) than they react positively to an increase of the latter (decrease in risk neutral skewness). The results of the paper point to the existence of a skewness risk premium in the Italian market. This emerges both from the fact that implied skewness is more negative than physical one in the sample period and from the profitability of skewness trading strategies. In addition, the higher performance of the portfolio composed by only put options indicates that the mispricing of options is mainly focused on the left part of the distribution

Systemic risk measures and macroprudential stress tests An assessment over the 2014 EBA exercise

The European Banking Authority (EBA) stress tests, which aim to quantify banks’ capital shortfall in a potential future crisis (adverse economic scenario), further stimulated an academic debate over systemic risk measures and their predictive/informative content. Focusing on marked based measures, Acharya et al. (2010) provides a theoretical background to justify the use of Marginal Expected Shortfall (MES) for predicting the stress test results, and verify it on the first stress test conducted after the 2007-2008 crises on the US banking system (SCAP, Supervisory Capital Assessment Program). The aim of this paper is to further test the goodness of MES as a predictive measure, by analysing it in relation to the results of the 2014 European stress tests exercise conducted by EBA. Our results are strongly dependent on index used to capture the systemic distress event, whereby MES, based on a global market index, does not show association with EBA stress test, by contrast to F-MES, which is based on a financial market index, and has a significant information and predictive power. Our results may carry useful regulatory implication for the stress test exercises

Commodity Speculation and Commodity Investment

I distinguish between speculation and index-based investment in commodity futures stressing the differing motivations of the two groups and the differing instruments that they use. I discuss the amounts of money deployed in these activities. I document evidence of extrapolative behaviour in metals prices, consistent with speculation affecting prices, and show that in at least one market (soybeans) index-based investment has a significant and persistent price impact.Commodities, Speculation, Asset Allocation

Risk Management in Environment, Production and Economy

The term "risk" is very often associated with negative meanings. However, in most cases, many opportunities can present themselves to deal with the events and to develop new solutions which can convert a possible danger to an unforeseen, positive event. This book is a structured collection of papers dealing with the subject and stressing the importance of a relevant issue such as risk management. The aim is to present the problem in various fields of application of risk management theories, highlighting the approaches which can be found in literature

BERT's sentiment score for portfolio optimization: a fine-tuned views in Black and Litterman model

In financial markets, sentiment analysis on natural language sentences can improve forecasting. Many investors rely on information extracted from newspapers or their feelings. Therefore, this information is expressed in their language. Sentiment analysis models classify sentences (or entire texts) with their polarity (positive, negative, or neutral) and derive a sentiment score. In this paper, we use this sentiment (polarity) score to improve the forecasting of stocks and use it as a new ‘‘view’’ in the Black and Litterman model. This score is related to various events (both positive and negative) that have affected some stocks. The sentences used to determine the scores are taken from articles published in Financial Times (an international financial newspaper). To improve the forecast using this average sentiment score, we use a Monte Carlo method to generate a series of possible paths for several trading hours after the article was published to discretize (or approximate) the Wiener measure, which is applied to the paths and returning an exact price as results. Finally, we use the price determined in this way to calculate a yield to be used as views in a new type of ‘‘dynamic’’ portfolio optimization, based on hourly prices. We compare the results by applying the views obtained, disregarding the sentiment and leaving the initial portfolio unchanged

Party group re-affiliation in the European Parliament

Party switching in national parliaments has become an established field of political science research entailing studies of single legislatures as well as cross-national analyses. In the case of the European Parliament (EP), approximately ten percent of all members (MEPs) change their party group label each session. When compared to national parliaments, only Brazil and Italy surpass this level of member volatility. The literature analyzing this phenomenon includes descriptive accounts and qualitative case studies, as well as single- and multi-session examinations. While this research produces valuable insights, the results have not yet provided scholars with a clear explanation for why so many MEPs change group labels. This cumulative dissertation analyzes and explains the causes of party group switching in the EP. In order to fully understand why MEPs re-affiliate so frequently, I examine not only the individual correlates of switching, but I also re-evaluate the EP’s system of party groups. In order to characterize the incentive structure MEPs face when choosing whether or not to switch groups, the first two papers examine the components of the EP party group system, including its format and mechanics. The second two papers then apply what is learned about the EP’s unevenly institutionalized party group system to the analysis of party group switching. These four papers conclude that the EP depends on the fully institutionalized core of EPGs to carry out its legislative responsibilities; however, the instability endemic to the weakly institutionalized periphery remains a serious impediment to the Parliament’s efficacy as a representative assembly. Party group switching in the EP is defined as the process by which a parliamentarian, or a national party delegation (NPD), leaves a home group to re-affiliate with a new, target group. Theories of party switching fall into two broad categories. The first pertains to the individual determinants of switching whereby politicians actively attempt to change their situation in order to satisfy political goals. Scholars in this school generally rely on Müller and Strøm’s (1999) theoretical tool kit to explain re-affiliation; that is, we assume that politicians who change their party label mid-career do so in an attempt to increase their odds of (re)election, to angle for key leadership positions, or to place themselves in a better position to influence policy. The second theory of switching addresses system-level conditions which make re-affiliation less costly to politicians because party labels and voter identification remain unconsolidated. The literature using this theory observes an increased incidence of switching where parties and party systems are weakly institutionalized, such as in post-Communist, Central and Eastern Europe, or in Latin American states during their transition to democracy. I advance the state of the art in the study of party group switching in the EP by proposing that, in an unevenly institutionalized party group system, both of these processes occur simultaneously. To explain the causes of party group re-affiliation, therefore, it is necessary to differentiate between switches caused by the collapse of inchoate groups and those originating from rational, individual motivations. Ambitious moderates change groups in search of policy influence or prestige. Yet, in parallel to these archetypal switchers, we also observe the involuntary ejection of a disintegrating group’s members, MEPs who must then find a new affiliation. In order to model the determinants of the first type, it is essential to control for the second. The first two papers use mixed methods to describe the historical emergence of the EP’s two-tiered party system and to identify the sources of party group institutionalization. The second two papers rely on statistical models to determine which variables significantly increase or decrease the odds of re-affiliation among ambitious MEPs after controlling for group collapse. In what follows, I briefly detail the findings of each paper. The first paper uses the analytical narrative approach and recounts the evolution of the EP’s party group system, 1979-2009. Analytical narratives combine the benefits of historical institutionalism with rigorous quantitative analysis by employing a model to identify an equilibrium position and the then testing the historical record against hypotheses derived from that model. In this paper, I introduce the concept of cartelization to describe the patterns of behavior responsible for the development of a bifurcated party system. Unlike previous scholarship which applies the cartel party theory to the EP, I divide cartelization into two separate processes—collusion and exclusion. Analyzing every roll-call vote from the first 30 years of the EP to determine whether or not collusion among the EPP and S&D increased over time, this paper illustrates how these groups gradually became a unified voting bloc. Further, the analysis of exclusion using mixed effects models reveals that periphery groups are much less likely to gain committee leadership positions or reports than core groups. The results, therefore, indicate that the concept of cartelization best defines the patterns of behavior observed in the first 30 years of the EP, a finding which calls into the question the long-standing belief that EPGs value consensus-building above all else. The second paper produces a typology of EPGs using fuzzy set Ideal Type Analysis (fsITA). In this analysis, I construct four original conditions derived from the literature on institutionalization, including consistency, concentration, volatility, and fragility, as well as a measure of tenure. From these factors, the fsITA identifies five distinct types of EPGs, two of which reflect developmental phases of fully institutionalized groups, and three which are associated with weak institutionalization. The second section of this paper traces the different developmental trajectories of several party families and illustrates cases of institutional consistency, progress, regress, and collapse. Finally, based on the results of the typology I create an indicator variable for fully institutionalized groups and include this in a negative binomial analysis of rapporteurship allocation, 1979-2014. The results show that members of fully institutionalized groups have many more opportunities to impact policy by managing multiple legislative reports than do their colleagues from weakly institutionalized groups. This paper, therefore, identifies endogenous, exogenous, and inter-parliamentary dimensions of weak institutionalization, and it extends the findings from the first paper regarding the exclusion of periphery members. Using a pooled logistic regression analysis to analyze between- and within-session switches (1979-2014), the third paper makes two vital contributions to the study of party group re-affiliation. First, the data set includes DW-Nominate scores which are used to measure delegation-to-group and member-to-group policy distances. Second, I include indicator variables which operationalize three types of party group collapse—mergers, dissolutions, and failure to reconvene following an election. In so doing, this paper accounts for both system- and individual-level determinants of re-affiliation. After controlling for weak institutionalization, the results provide original insights into the causes of switching. Most significantly, the analysis shows that large national delegations change group labels, not because they are seeking offices or policy influence, but rather because they are over-represented in collapsing, weakly institutionalized groups. The benefits of considering the impact of an unevenly institutionalized party system are clearly on display in this paper. The final paper uses multi-level logistic regression models to study party group re-affiliation, and it tests directly the conclusion made by Hix and Noury (2018) which states that ideologically outlying MEPs are the most likely switchers. In this paper, I differentiate between cascade switchers, those members who re-affiliate following the collapse of their group, and ambitious switchers, members who switched only once during a term and who were not involved in a cascade. All members of collapsing groups, no matter their age, tenure, or position within the EPG, are forced to re-affiliate; therefore, in order to properly estimate the effect of policy-outlying on switching, it is necessary to restrict cascade switchers from the dependent variable and focus only on ambitious switchers. The results show that, in fact, outliers are often viewed as unreliable partners, and according to multiple measures, they are statistically less likely to succeed in switching party groups. Alternatively, ambitious moderates are the most likely MEPs to change groups. In sum, these papers identify the collapse of weakly institutionalized groups as the primary explanation for the high frequency of party group switching in the EP. After controlling for cascade switches, the evidence shows that delegations are more likely to re-affiliate when they are ideologically incongruent with their group, but MEPs have higher odds of exiting if they oppose their EPG on issues associated with European integration. Finally, the evidence implies that to successfully complete a switch, ambitious MEPs have to present themselves to potential targets as reliable partners. Therefore, outliers have lower odds of switching than more moderate members who only disagree with their group on a single policy dimension. This research rests on an original dataset compiled from several sources. The Høyland, Sircar, and Hix (2009), Automated Database for the European Parliament provides me with all of the party switching variables, as well as the original, aggregated, EPG-level variables used for the institutionalization typology. Furthermore, the roll call voting data from Hix, Roland, and Noury (2007), are pivotal for calculating the DW-Nominate scores. I used Daniel’s (2015) data set for the MEP gender variable, and his replication files were also used for the report allocation model found in the second paper. Hix and Noury (2018) made their NPD in government and commissioner variables available to me for the third paper. Party positions were collected from the ParlGov dataset (Döring and Manow 2016). My dissertation views the EP through the lens of party group switching, and the results should inspire scholars to re-evaluate some of the long-standing assumptions found in the literature. For example, the evidence of exclusion makes it difficult to argue that MEPs and EPGs are primarily consensus-oriented and focused on building over-sized, inclusive coalitions. Additionally, the disproportionate allocation of reports to members of weakly institutionalized groups counters the literature’s claim that under-representation results primarily from self-exclusion. Most importantly, however, this collection of papers provides a historical and empirical account for explaining how rational political decisions, made by self-interested politicians, unintentionally created a cartelized party group system, bound together by the dual processes of collusion and exclusion. On one hand, collusion among members of the grand coalition ensured that the EP would become a functional, legislative organ within the European Union’s political system. On the other hand, exclusion makes it very difficult for members of periphery groups to advocate for the interests of their constituents and therefore diminishes the EP’s ability to function as a representative assembly. Further, the marginalization of non-core members encourages the emergence and reproduction of an unevenly institutionalized, two-tiered party group system. Though not the first to identify trade-offs faced by parliaments tasked with undertaking multiple responsibilities, the interpretation presented here does provide an endogenous explanation for how and why the EP came to privilege legislative efficiency over parliamentary representation. The literature draws a clear line connecting cartelization and uneven institutionalization to the attenuation of a parliament’s ability to represent its electorate. If my conclusions are accurate, then the price paid for the EP’s well-documented investment in increasing its law-making effectiveness, is its inability to provide substantive representation, especially to the growing number of citizens who do not support the pursuit of an “ever closer union.” Therefore, to appreciate the strength of the EP as a legislative body, one must focus on cooperation and collusion among the core groups; yet to understand the reasons why the Parliament has a had a much harder time connecting with the European electorate and acting as a representative assembly capable of imbuing the EU with input-oriented legitimacy, it is necessary to analyze the exclusion of the weakly institutionalized groups.Parteiwechsel in nationalen Parlamenten ist zu einem etablierten Feld der politikwissenschaftlichen Forschung geworden, die sich auf Einzelfälle wie auch länderübergreifende Analysen von Legislativen konzentriert. Im Fall des Europäischen Parlaments (EP) wechseln innerhalb jeder Legislaturperiode ungefähr zehn Prozent aller Mitglieder (MEPs) ihre Fraktion. Im Vergleich zu nationalen Parlamenten überschreiten nur Brasilien und Italien dieses Niveau an Mitgliedervolatilität. Bisherige Literatur zu diesem Phänomen beinhaltet deskriptive Analysen, qualitative Fallstudien und Untersuchungen von einzelnen und mehreren Legislaturperioden. Während diese Forschung wertvolle Erkenntnisse liefert, geben die Ergebnisse noch keine klare Erklärung dafür, warum so viele MEPs ihre Fraktionszugehörigkeit wechseln. Die vorliegende kumulative Dissertation analysiert und erklärt die Ursachen vom Fraktionswechsel im Europäischen Parlament. Ich ziele darauf zu zeigen, warum Mitglieder des EP ihre Fraktionszugehörigkeit so oft wechseln und untersuche zu diesem Zweck nicht nur individuelle Korrelate von Fraktionswechseln, sondern evaluiere auch das Fraktionensystem im EP. Die ersten zwei Artikel untersuchen Aspekte des EP- Fraktionensystems – darunter sein Format und die Mechanik – um Anreizstrukturen zu beschreiben, mit denen MEPs bei ihrer Entscheidung für oder gegen einen Wechsel konfrontiert sind. Die weiteren zwei Artikel wenden die Befunde einer Untersuchung der unausgeglichenen Institutionalisierung des EP-Fraktionensystems auf die Analyse vom Fraktionswechsel an. Das Fazit dieser vier Artikel ist es, dass das EP den vollkommen instutionalisierten Kern von europäischen Fraktionen benötigt um seine legislativen Aufgaben zu erfüllen; die endemische Instabilität der schwach institutionalisierten Peripherie bleibt jedoch ein ernstes Hindernis für die Effizienz des EP als eine repräsentative Versammlung. Ich definiere Fraktionswechsel im EP als ein Prozess, in dem einzelne Abgeordnete oder die Delegation einer mitgliedstaatlichen Partei ihre bisherige Gruppe verlassen und sich einer anderen Zielgruppe anschließen. Bisherige Theorien von Parteiwechsel können in zwei breite Kategorien aufgeteilt werden. Die erste erörtert individuelle Faktoren des Wechsels, wonach Politiker*innen aktiv versuchen ihre Situation zu verändern um politische Ziele zu erfüllen. Dieser Ansatz erklärt das Wechselverhalten basierend auf der theoretischen Grundlage von Müller und Strøm (1999); es wird angenommen, dass Politiker*innen ihre Partei mitten in ihrer Karriere wechseln um zu versuchen, ihre Chancen auf (Wieder)wahl zu erhöhen, relevante Führungspositionen zu erzielen, oder sich in einer besseren Position zu stellen um Policy-Inhalte zu beeinflussen. Die zweite Theorie des Wechselverhaltens fokussiert auf Bedingungen auf systemischer Ebene, die die Kosten eines Wechsels reduzieren, da Parteibezeichnungen und Wähleridentifikation nicht konsolidiert bleiben. Dieser Forschungszweig beobachtet ein zunehmendes Vorkommen an Wechselverhalten dort, wo Parteien und Parteiensysteme schwach institutionalisiert sind, beispielsweise in postkommunistischem Mittel- und Osteuropa oder in lateinamerikanischen Staaten während ihrer demokratischen Transformationsphasen. Mein Forschungsbeitrag zum Fraktionswechsel im EP besteht in der Behauptung, dass in einem ungleichmäßig institutionalisierten Fraktionensystem diese beiden Prozesse gleichzeitig auftreten. Um die Ursachen von Fraktionswechselverhalten zu verstehen, ist es daher relevant zwischen zwei Typen von Wechsel zu unterscheiden: Wechsel, die durch einen Zusammenbruch von schwach institutionalisierte Gruppen verursacht sind; und solche Wechsel, die ihren Ursprung in rationalen, individuellen Motivationen haben. Ambitionierte gemäßigte Mitglieder wechseln ihre Fraktion auf der Suche nach Policy-Einfluss oder Prestige. Parallel zu diesen archetypischen Wechslern beobachten wir allerdings ein unfreiwilliges Ausscheiden aus einer auseinanderfallenden Fraktion, deren MEPs eine neue Zugehörigkeit finden müssen. Um die Determinanten des ersten Wechseltyps zu modellieren, ist zugleich der zweite Wechseltyp zu kontrollieren. Die ersten zwei Artikel verwenden gemischte Forschungsmethoden um die historische Entwicklung des zweistufigen Fraktionensystem zu erörtern und die Quellen der Institutionalisierung des EP-Fraktionensystem zu identifizieren. Die weiteren zwei Artikel basieren auf statistischen Modellen und bestimmen, welche Variablen signifikant die Chancen von Wechselverhalten ambitionierter MEPs erhöhen oder senken, und dabei für Fraktionszusammenbruch kontrollieren. Im Folgenden erläutere ich kurz die näheren Ergebnisse jeden Artikels. Der erste Artikel benutzt den Ansatz des Analytischen Narrativen und erörtert die Evolution des EP-Fraktionensystems zwischen 1979 und 2009. Analytische Narrative verbinden die Vorteile des historischen Institutionalismus mit einer rigorosen quantitativen Analyse und verwenden ein Modell um eine Equilibrium position zu identifizieren. Mit ihnen lassen sich dann die historischen Daten mit den aus diesem Modell abgeleiteten Hypothesen vergleichen. Um Verhaltensmuster zu beschreiben, die zur Entwicklung eines gabelförmig geteilten Parteiensystems führen, stelle ich den Konzeptbegriff der Kartellierung vor. Im Unterschied zur bisherigen Forschung, die die Kartellparteitheorie auf das EP anwendet, unterteile ich Kartellierung in zwei separate Prozesse – Kollusion und Exklusion. Ich analysiere jede namentliche Abstimmung in den ersten 30 Jahren des EP um zu bestimmen, ob die Kollusion in der EVP und S&D mit der Zeit zunahm oder nicht und illustriere, wie diese Gruppen graduell zu einem einheitlichen Abstimmungsblock geworden sind. Weiterhin zeigt die Analyse von Exklusion mithilfe von Mixed-Effects-Modellen, dass periphere Fraktionen viel weniger wahrscheinlich Positionen der Ausschussleitung oder Berichterstattung erhalten als die Kernfraktionen. Die Ergebnisse zeigen daher, dass die Verhaltensmuster in den ersten 30 Jahren des EP am besten mit dem Begriff der Kartellierung definiert werden können. Dieser Befund stellt auch die anhaltende Überzeugung in Frage, dass Fraktionen im EP in ihrer Arbeit den Wert vor allem auf Konsensbildung legen. Der zweite Arikel bietet eine Typologie von EP-Fraktionen und verwendet dafür die fuzzy set Ideal Type Analysis (fsITA). Abgeleitet aus der Institutionalismusforschung konzipiere ich vier originelle Bedingungen, darunter Konsistenz, Volatilität und Fragilität sowie eine Maßeinheit für die Dauer des Mandats. Die fsITA identifiziert anhand dieser Faktoren fünf unterschiedliche Typen von EP-Fraktionen. Zwei davon spiegeln die Entwicklungsphasen vollkommen institutionalisierter Gruppen wieder, drei davon sind assoziiert mit schwacher Institutionalisierung. Im zweiten Teil analysiert das Paper unterschiedliche Entwicklungsabläufe mehrerer Parteienfamilien und illustriert Fälle von institutioneller Konsistenz, Fortschritt, Rückschritt und Kollaps. Schließlich entwickle ich auf der Grundlage der Typologie einen Indikator für vollkommen institutionalisierte Gruppierungen und integriere ihn in eine negative binomiale Analyse von Berichterstattungszuweisung im Zeitraum von 1979 bis 2014. Die Ergebnisse zeigen, dass Mitglieder vollkommen institutionalisierter Gruppen mehr Möglichkeiten an Policy-Einfluss durch die Verwaltung mehrfacher legislativer Berichte haben als ihre Kolleg*innen aus schwach institutionalisierten Gruppen. Das Paper identifiziert so endogene, exogene und inter-parlamentarische Dimensionen schwacher Institutionalisierung. Es erweitert die Ergebnisse des ersten Artikels bezüglich der Exklusion peripherer Mitglieder. Der dritte Artikel verwendet eine zusammengeführte logistische Regressionsanalyse um Wechselverhalten innerhalb und zwischen den Legislaturperioden zu untersuchen (1979-2014). Es liefert dadurch zwei wesentliche Beiträge zur Analyse von Fraktionswechsel. Erstens beinhaltet der Datensatz DW-Nominate-Werte, die zur Messung von Policy-Distanzen zwischen Delegationen und Fraktionen sowie zwischen Mitgliedern und Fraktionen verwendet werden. Zweitens verwende ich Indikatoren für drei Typen von Fraktionskollaps – Fusion, Auflösung und fehlendes Wiederzusammenkommen nach einer Wahl. Dadurch berücksichtige ich sowohl systembezogene als auch individuelle Determinanten von Wechselverhalten. Ich kontrolliere das Auftreten vonschwacher Institutionalisierung und biete danach Einblicke in die Ursachen von Wechselverhalten. Ich zeige, dass große nationale Parteidelegationen ihre Fraktion nicht deswegen wechseln, weil sie nach Ämtern oder Policy-Einfluss streben, sondern vielmehr weil sie in auseinander