A profit model for spread trading with an application to energy futures

This paper proposes a profit model for spread trading by focusing on the stochastic movement of the price spread and its first hitting time probability density. The model is general in that it can be used for any financial instrument. The advantage of the model is that the profit from the trades can be easily calculated if the first hitting time probability density of the stochastic process is given. We then modify the profit model for a particular market, the energy futures market. It is shown that energy futures spreads are modeled by using a meanreverting process. Since the first hitting time probability density of a mean-reverting process is approximately known, the profit model for energy futures price spreads is given in a computable way by using the parameters of the process. Finally, we provide empirical evidence for spread trades of energy futures by employing historical prices of energy futures (WTI crude oil, heating oil, and natural gas futures) traded on the New York Mercantile Exchange. The results suggest that natural gas futures trading may be more profitable than WTI crude oil and heating oil due to its high volatility in addition to its long-term mean reversion, which offers supportive evidence of the model prediction. --futures spread trading,energy futures markets,mean-reverting process,first hitting,time probability density,profit model,WTI crude oil,heating oil,natural gas

The benchmark U.S. Treasury market: recent performance and possible alternatives

Forecasting ; Economic indicators ; Treasury bills ; Government securities ; Budget ; Debts, Public

Combating Suburban Sprawl in the Capital District: An Outline for Regional Sustainable Development

Urban centers in America have commonly been plagued by high rates of pollution, decaying infrastructure, and the overall image of being undesirable places to live. Beginning in the second half of the twentieth century, masses of people vacated the cities that they called home, for literally greener pastures, settling in outlying, low-density living areas that became known as the suburbs. Suburbanization has particularly impacted the land use pattern in the Capital District of New York State, as countless suburbs developed away from the region’s urban centers of Albany, Schenectady and Troy. Recently people have moved back into the Capital District’s urban areas to work and live, however, the adverse suburban impact of sprawl remains firmly intact. To mitigate the impacts of sprawl, sustainable regional policy-making must be promoted. While every policymaker envisions the concepts of sustainability and smart growth differently, this study examines specific public policies that have both fostered sprawl and the policies that are geared towards reigning in the problem that has long saddled the Capital District. Policies promoting sustainability have already been implemented in areas like Portland, Oregon. Ultimately, a regional urban sustainability outline will be developed for the Capital District. In crafting the plan, numerous variables will be taken into account: political, cultural, economic, and social. It is imperative that cities and the communities that surround them are structured in a way that nourishes environmentally responsible behavior and overall quality of life

Informational Inequality: How High Frequency Traders Use Premier Access to Information to Prey on Institutional Investors

In recent months, Wall Street has been whipped into a frenzy following the March 31st release of Michael Lewis’ book “Flash Boys.” In the book, Lewis characterizes the stock market as being rigged, which has institutional investors and outside observers alike demanding some sort of SEC action. The vast majority of this criticism is aimed at high-frequency traders, who use complex computer algorithms to execute trades several times faster than the blink of an eye. One of the many complaints against high-frequency traders is over parasitic trading practices, such as front-running. Front-running, in the era of high-frequency trading, is best defined as using the knowledge of a large impending trade to take a favorable position in the market before that trade is executed. Put simply, these traders are able to jump in front of a trade before it can be completed. This Note explains how high-frequency traders are able to front-run trades using superior access to information, and examines several proposed SEC responses

Appropriate policy measures to attract private capital in consideration of regional efficiency in using infrastructure and human capital

Regional economic policy disposes of two principal options to attract private capital, which in turn helps to safeguard employment and to foster regional growth. On the one hand, regional policy could seek to enhance a region's level of public capital (e.g. transport infrastructure), which as a consequence makes the region more attractive to private investors in general. On the other hand, private capital could be attracted in a more direct way by proposing specific innovation, SME or cluster programs. The success of both options is partly driven by the regions already existing level of region specific production factors and the ability to use these factors efficiently. Indirect approaches to attract private capital seem to be particularly promising for efficient regions (no matter of the absolute level of public capital). In contrast, inefficient regions shall benefit more from specific programs. However, for Germany the factual pattern seems to be the other way around, which could widening rather than closing the income gap among regions. --

Who Bears the Balloon Risk in Commercial MBS?

Much of the literature on the pricing of commercial mortgages underlying commercial mortgage-backed securities pools focuses on the effect of term default (default during the term of the loan), and ignores the possibility of balloon risk, the borrower\u27s inability to pay off the mortgage at maturity through refinancing or property sale. A contingent-claims mortgage pricing model that includes two default triggers—a cash flow trigger and an asset value trigger—may be used to assess the effect of balloon risk on the pricing of CMBS tranches. Simulations of cash flows for individual loans in a CMBS framework reveal how individual tranches are affected by balloon risk. Balloon risk is low at the whole-loan level, but under a number of scenarios total credit risk and balloon risk creep into investment-grade CMBS tranches and significantly impact their valuation

Extension Risk in Commercial Mortgages

Historical data and Monte Carlo simulation is used to examine the likelihood of loan extension and potential losses associated with extension. It is found that extension probability is highly sensitive to property NOI growth, to NOI volatility, to the amortization schedule, and to the loan term. It is found that extension risk is largely unaffected by changing credit spreads, changing yield curve assumptions, and changing term default assumptions. It is found that changing the underwriting standards affects the probability of loan extension in a somewhat muted way. It is estimated that the loss during extension is approximately 2%-3% of the outstanding loan amount at maturity

Are TIPS really tax disadvantaged? Rethinking the tax treatment of U.S. Treasury Inflation Indexed Securities

In 1997 the U.S. Treasury introduced Inflation Indexed (or Protected) Securities with substantial promotional fanfare. Yet, due in part to what some in the finance profession have described as a "tax disadvantage" placed upon TIPS, many are questioning whether they should appeal to a wide audience. Some, in fact, advise holding TIPS only in tax-deferred accounts. In this paper, the authors develop a framework that allows us to demonstrate that the tax treatment of TIPS is trivially different from that of conventional Treasury securities. Utilizing an after-tax valuation approach, they further show that under relatively conservative projections for inflation, TIPS generally have after-tax yields comparable to, if not exceeding, conventional fixed-rate Treasury securities.Investments ; Taxation ; Securities ; Interest rates ; Income tax