Application of Hidden Markov Models and Hidden Semi-Markov Models to Financial Time Series

Hidden Markov Models (HMMs) and Hidden Semi-Markov Models (HSMMs) provide flexible, general-purpose models for univariate and multivariate time series. Although interest in HMMs and HSMMs has continuously increased during the past years, and numerous articles on theoretical and practical aspects have been published, several gaps remain. This thesis addresses some of them, divided into three main topics. 1. Computational issues in parameter estimation of stationary HMMs. The parameters of a HMM can be estimated by direct numerical maximization (DNM) of the log-likelihood function or, more popularly, using the Expectation-Maximization (EM) algorithm. We show how the EM algorithm could be modified to fit stationary HMMs. We propose a hybrid algorithm that is designed to combine the advantageous features of the EM and DNM algorithms, and compare the performance of the three algorithms (EM, DNM and the hybrid). We then describe the results of an experiment to assess the true coverage probability of bootstrap-based confidence intervals for the parameters. 2. A Markov switching approach to model time-varying Beta risk of pan-European Industry portfolios. The motive to take up this topic was the development of a joint model for many financial time series. We study two Markov switching models in a Capital Asset Pricing Model framework, and compare their forecast performances to three models, namely a bivariate t-GARCH(1,1) model, two Kalman filter based approaches and a bivariate stochastic volatility model. 3. Stylized facts of financial time series and HSMMs. The ability of a HMM to reproduce several stylized facts of daily return series was illustrated by Ryden et al. (1998). However, they point out that one stylized fact cannot be reproduced by a HMM, namely the slowly decaying autocorrelation function of squared returns. We present two HSMM-based approaches to model eighteen series of daily sector returns with about 5.000 observations. The key result is that, compared to a HMM, the slowly decaying autocorrelation function is significantly better described by a HSMM with negative binomial sojourn time and Normal conditional distributions.

Sum-rule Conserving Spectral Functions from the Numerical Renormalization Group

We show how spectral functions for quantum impurity models can be calculated very accurately using a complete set of ``discarded'' numerical renormalization group eigenstates, recently introduced by Anders and Schiller. The only approximation is to judiciously exploit energy scale separation. Our derivation avoids both the overcounting ambiguities and the single-shell approximation for the equilibrium density matrix prevalent in current methods, ensuring that relevant sum rules hold rigorously and spectral features at energies below the temperature can be described accurately.Comment: 4 pages + 1 page appendix, 2 figure

A bivariate first-order signed integer-valued autoregressive process

Bivariate integer-valued time series occur in many areas, such as finance, epidemiology, business etc. In this paper, we present bivariate autoregressive integer-valued time series models, based on the signed thinning operator. Compared to classical bivariate INAR models, the new processes have the advantage to allow for negative values for the time series and the autocorrelation functions. Strict stationarity and ergodicity of the processes are established. The moments and the autocovariance functions are determined. Some methods for estimating the model parameters are considered and the asymptotic properties of the obtained estimators are derived. Simulation experiments as well as analysis of real data sets are carried out to assess the models' performance

Application of Hidden Markov Models and Hidden Semi-Markov Models to Financial Time Series

Hidden Markov Models (HMMs) and Hidden Semi-Markov Models (HSMMs) provide flexible, general-purpose models for univariate and multivariate time series. Although interest in HMMs and HSMMs has continuously increased during the past years, and numerous articles on theoretical and practical aspects have been published, several gaps remain. This thesis addresses some of them, divided into three main topics. 1. Computational issues in parameter estimation of stationary HMMs. The parameters of a HMM can be estimated by direct numerical maximization (DNM) of the log-likelihood function or, more popularly, using the Expectation-Maximization (EM) algorithm. We show how the EM algorithm could be modified to fit stationary HMMs. We propose a hybrid algorithm that is designed to combine the advantageous features of the EM and DNM algorithms, and compare the performance of the three algorithms (EM, DNM and the hybrid). We then describe the results of an experiment to assess the true coverage probability of bootstrap-based confidence intervals for the parameters. 2. A Markov switching approach to model time-varying Beta risk of pan-European Industry portfolios. The motive to take up this topic was the development of a joint model for many financial time series. We study two Markov switching models in a Capital Asset Pricing Model framework, and compare their forecast performances to three models, namely a bivariate t-GARCH(1,1) model, two Kalman filter based approaches and a bivariate stochastic volatility model. 3. Stylized facts of financial time series and HSMMs. The ability of a HMM to reproduce several stylized facts of daily return series was illustrated by Ryden et al. (1998). However, they point out that one stylized fact cannot be reproduced by a HMM, namely the slowly decaying autocorrelation function of squared returns. We present two HSMM-based approaches to model eighteen series of daily sector returns with about 5.000 observations. The key result is that, compared to a HMM, the slowly decaying autocorrelation function is significantly better described by a HSMM with negative binomial sojourn time and Normal conditional distributions

Hidden Markov models with t components. Increased persistence and other aspects

Hidden Markov models have been applied in many different fields during the last decades, including econometrics and finance. However, the lion’s share of the investigated models is Markovian mixtures of Gaussian distributions. We present an extension to conditional t-distributions, including models with unequal distribution types in different states. It is shown that the extended models, on the one hand, reproduce various stylized facts of daily returns better than the common Gaussian model. On the other hand, robustness to outliers and persistence of the visited states increases significantly

Detection of viral sequence fragments of HIV-1 subfamilies yet unknown

<p>Abstract</p> <p>Background</p> <p>Methods of determining whether or not any particular HIV-1 sequence stems - completely or in part - from some unknown HIV-1 subtype are important for the design of vaccines and molecular detection systems, as well as for epidemiological monitoring. Nevertheless, a single algorithm only, the Branching Index (BI), has been developed for this task so far. Moving along the genome of a query sequence in a sliding window, the BI computes a ratio quantifying how closely the query sequence clusters with a subtype clade. In its current version, however, the BI does not provide predicted boundaries of unknown fragments.</p> <p>Results</p> <p>We have developed <it>Unknown Subtype Finder </it>(USF), an algorithm based on a probabilistic model, which automatically determines which parts of an input sequence originate from a subtype yet unknown. The underlying model is based on a simple profile hidden Markov model (pHMM) for each <it>known </it>subtype and an additional pHMM for an <it>unknown </it>subtype. The emission probabilities of the latter are estimated using the emission frequencies of the known subtypes by means of a (position-wise) probabilistic model for the emergence of new subtypes. We have applied USF to SIV and HIV-1 sequences formerly classified as having emerged from an unknown subtype. Moreover, we have evaluated its performance on artificial HIV-1 recombinants and non-recombinant HIV-1 sequences. The results have been compared with the corresponding results of the BI.</p> <p>Conclusions</p> <p>Our results demonstrate that USF is suitable for detecting segments in HIV-1 sequences stemming from yet unknown subtypes. Comparing USF with the BI shows that our algorithm performs as good as the BI or better.</p

Application of Hidden Markov Models and Hidden Semi-Markov Models to Financial Time Series

Hidden Markov Models (HMMs) and Hidden Semi-Markov Models (HSMMs) provide flexible, general-purpose models for univariate and multivariate time series. Although interest in HMMs and HSMMs has continuously increased during the past years, and numerous articles on theoretical and practical aspects have been published, several gaps remain. This thesis addresses some of them, divided into three main topics. 1. Computational issues in parameter estimation of stationary HMMs. The parameters of a HMM can be estimated by direct numerical maximization (DNM) of the log-likelihood function or, more popularly, using the Expectation-Maximization (EM) algorithm. We show how the EM algorithm could be modified to fit stationary HMMs. We propose a hybrid algorithm that is designed to combine the advantageous features of the EM and DNM algorithms, and compare the performance of the three algorithms (EM, DNM and the hybrid). We then describe the results of an experiment to assess the true coverage probability of bootstrap-based confidence intervals for the parameters. 2. A Markov switching approach to model time-varying Beta risk of pan-European Industry portfolios. The motive to take up this topic was the development of a joint model for many financial time series. We study two Markov switching models in a Capital Asset Pricing Model framework, and compare their forecast performances to three models, namely a bivariate t-GARCH(1,1) model, two Kalman filter based approaches and a bivariate stochastic volatility model. 3. Stylized facts of financial time series and HSMMs. The ability of a HMM to reproduce several stylized facts of daily return series was illustrated by Ryden et al. (1998). However, they point out that one stylized fact cannot be reproduced by a HMM, namely the slowly decaying autocorrelation function of squared returns. We present two HSMM-based approaches to model eighteen series of daily sector returns with about 5.000 observations. The key result is that, compared to a HMM, the slowly decaying autocorrelation function is significantly better described by a HSMM with negative binomial sojourn time and Normal conditional distributions

Modelling clusters of corporate defaults: Regime-switching models significantly reduce the contagion source

In this paper, we report robust evidence that the process of corporate defaults is time-dependent and can be modelled by extending an autoregressive count time series model class via the introduction of regime-switching. That is, some of the parameters of the model depend on the regime of an unobserved Markov chain, capturing the model changes during clusters observed for count time series in corporate defaults. Thus, the process of corporate defaults is more dynamic than previously believed. Moreover, the contagion effect—that current defaults affect the probability of other firms defaulting in the future—is reduced compared to models without regime-switching, and is only present in one regime. A two-regime model drives the counts of monthly corporate defaults in the United States. To estimate the model, we introduce a novel quasi-maximum likelihood estimator by adapting the extended Hamilton–Gray algorithm for the Poisson autoregressive model.publishedVersio

DYNAMIC MIXTURES OF FACTOR ANALYZERS TO CHARACTERIZE MULTIVARIATE AIR POLLUTANT EXPOSURES

The assessment of pollution exposure is based on the analysis of multivariate time series that include the concentrations of several pollutants as well as the measurements of multiple atmospheric variables. It typically requires methods of dimensionality reduction that are capable to identify potentially dangerous combinations of pollutants and, simultaneously, to segment exposure periods according to air quality conditions. When the data are high-dimensional, however, efficient methods of dimensionality reduction are challenging because of the formidable structure of cross-correlations that arise from the dynamic interaction between weather conditions and natural/anthropogenic pollution sources. In order to assess pollution exposure in an urban area while taking the above mentioned difficulties into account, we develop a class of parsimonious hidden Markov models. In a multivariate time-series setting, this approach allows to simultaneously perform temporal segmentation and dimensionality reduction. We specifically approximate the distribution of multiple pollutant concentrations by mixtures of factor analysis models, whose parameters evolve according to a latent Markov chain. Covariates are included as predictors of the chain transition probabilities. Parameter constraints on the factorial component of the model are exploited to tune the flexibility of dimensionality reduction. In order to estimate the model parameters efficiently, we propose a novel three-step Alternating Expected Conditional Maximization (AECM) algorithm, which is also assessed in a simulation study. In the case study, the proposed methods were capable (1) to describe the exposure to pollution in terms of a few latent regimes, (2) to associate these regimes with specific combinations of pollutant concentration levels as well as distinct correlation structures between concentrations, and (3) to capture the influence of weather conditions on transitions between regime