A behavioral asset pricing model with a time-varying second moment

We develop a simple behavioral asset pricing model with fundamentalists and chartists in order to study price behavior in financial markets when chartists estimate both conditional mean and variance by using a weighted averaging process. Through a stability, bifurcation, and normal form analysis, the market impact of the weighting process and time-varying second moment are examined. It is found that the fundamental price becomes stable (unstable) when the activities from both types of traders are balanced (unbalanced). When the fundamental price becomes unstable, the weighting process leads to different price dynamics, depending on whether the chartists act as either trend followers or contrarians. It is also found that a time-varying second moment of the chartists does not change the stability of the fundamental price, but it does influence the stability of the bifurcations. The bifurcation becomes stable (unstable) when the chartists are more (less) concerned about the market risk characterized by the time-varying second moment. Different routes to complicated price dynamics are also observed. The analysis provides an analytical foundation for the statistical analysis of the corresponding stochastic version of this type of behavioral model. © 2005 Elsevier Ltd. All rights reserved

Statistical properties of a heterogeneous asset pricing model with time-varying second moment

Stability and bifurcation analysis of deterministic systems has been widely used in modeling financial markets. However, the impact of such dynamic phenomena on various statistical properties of the corresponding stochastic model, including skewness and excess kurtosis, various autocorrelation (AC) patterns of under and over reactions, and volatility clustering characterised by the long-range dependence of ACs, is not clear and has been very little studied. This paper aims to contribute to this issue. Through a simple behavioural asset pricing model with fundamentalists and chartists, we examine the statistical properties of the model and their connection to the dynamics of the underlying deterministic model. In particular, our analysis leads to some insights into various mechanisms that may generate some of the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data. © 2006 Springer-Verlag Berlin Heidelberg

The volatility structure of the fixed income market under the HJM framework: A nonlinear filtering approach

ABSTRACT. This paper considers the dynamics for interest rate processes within a multi-factor Heath, Jarrow and Morton (1992) specification. Despite the flexibility of and the notable advances in theoretical research about the HJM models, the number of empirical studies is still inadequate. This paucity is principally because of the difficulties in estimating models in this class, which are not only high-dimensional, but also nonlinear and involve latent state variables. This paper treats the estimation of a fairly broad class of HJM models as a nonlinear filtering problem, and adopts the local linearization filter of Jimenez and Ozaki (2003), which is known to have some desirable statistical and numerical features, to estimate the model via the maximum likelihood method. The estimator is then applied to the interbank offered-rates of the U.S, U.K, Australian and Japanese markets. The two-factor model, with the factors being the level and the slope effect, is found to be a reasonable choice for all of the markets. However, the contribution of each factor towards overall variability of the interest rates and the financial reward each factor claims differ considerably from one market to another

Coarse-grained deltas approaching shallow-water canyon heads: A case study from the Lower Pleistocene Messina Strait, Southern Italy

The tide-dominated Messina Strait (southern Italy) is a 3 km wide marine passageway, whose block-faulted borders form steep subaqueous zones incised by canyons and gullies. These erosional features retreat towards the shorelines and are often in direct connection with subaerial valley-bounded river deltas. High-energy density-flows generated by river floods periodically enter the canyon heads, attaining supercritical-flow regime and accreting large, upslope-migrating bedforms. Although these bedforms have been documented in recent studies, little attention has been paid to the definition of the type of delta entering canyon heads, the internal features of river-influenced deposits accumulated in the nearshore zone, and their interplay with tidal currents flowing axially to the strait. This study focuses on a Lower Pleistocene coarse-grained succession exposed along the north-eastern margin of the modern Messina Strait, investigated using conventional facies analysis and sedimentological logging, integrated with photogrammetric techniques and interpretation of drone-acquired imagery. Facies confinement between basement blocks suggests a subaqueous delta complex shed from the tectonically controlled margin of the ancient strait and entering shallowly submerged canyon heads. Basal breccias, conglomerates and pebbly sandstones exhibiting channel-form discontinuities and upslope dipping backsets are interpreted as cyclic-step and antidune deposits. Units composed of these facies are comprised between master erosional surfaces and tidal ravinement surfaces. The tidal ravinements suggest that canyon infill occurred during a major phase of sea-level rise, punctuated by minor falls and stillstands. These surfaces are overlain by mixed bioclastic–siliciclastic, arenitic, trough and planar cross-strata, representing dunes migrating roughly parallel to the palaeo-coastline and originated by tidal currents amplified by the narrowing of the ancient Messina Strait. Tidal-influenced sedimentation dominated over the fluvial-influenced processes during the late transgression, overfilling the canyon relief. The exceptionally good exposure of depositional architectures and facies characteristics is key to outline the general features of a specific type of delta system, fed by valley-bounded rivers and entering canyon heads in the nearshore of tectonically-controlled, tide-influenced steep strait margins. The pre-existing subaqueous incised topography forced the delta front to be split into lobe branches during the canyon infilling, hampering clinoform architectures and preserving large supercritical-flow sedimentary structures. This study suggests these as possible criteria for the recognition of similar systems in outcrop or subsurface

Sedimentology and facies analysis of ancient sand ridges: Jurassic Rogn Formation, Trøndelag Platform, offshore Norway

Sand ridges represent a common type of sedimentary bedform of modern shelves seldom used as analogues to interpret isolated marine sandbodies recognised in the subsurface. Lack of extended literature on outcrop and subsurface examples limits the possibility for their recognition and seems one of the reason behind this underrepresentation. The Draugen discovery made in the early 80's represents an unicum in the Trøndelag Platform, offshore Norway. After more than 30 years the Froan Basin and Frøya High area are still underexplored and the Late Jurassic Rogn Fm play not well understood. Predicting reservoir distribution, and its internal architecture and properties requires the understanding of factors controlling sedimentation (e.g. palaeocirculation, depositional processes). North-south elongated sandbodies pertaining to the Rogn Formation are recognised in the Froan Basin and Frøya High encased within thick shaly deposits. Sandbodies develop above a ravinement or flooding surface (i.e. Callovian Unconformity) of regional extent where local depressions occur with a non-erosional concave-up top. Depressions representing the depositional loci for the accumulation of sand and development of the ridge. The presence of eastward and westward dipping reflections within the sandbodies allows identifying their large-scale architectures. Sediments form coarsening-upward vertical units characterised by a shaly base evolving upwards to medium- and coarse-grained sand forming tabular and trough cross strata. Locally, a fining upward trend characterised by plane-parallel stratification and coarse-grained massive layers is recognised. Sediments results well organised and sorted, which positively affects final porosity and permeability with values up to 30% and 6 Darcy, respectively - typical values for many sand ridges. Accordingly, sand ridges encased within thick shaly deposits can form stratigraphic traps with the potential for large hydrocarbon accumulations. The aim of the present study is to help the understanding of distribution, and internal architectures and properties of the Rogn Fm in the Trøndelag Platform

The stochastic bifurcation behaviour of speculative financial markets

This paper establishes a continuous-time stochastic asset pricing model in a speculative financial market with fundamentalists and chartists by introducing a noisy fundamental price. By application of stochastic bifurcation theory, the limiting market equilibrium distribution is examined numerically. It is shown that speculative behaviour of chartists can cause the market price to display different forms of equilibrium distributions. In particular, when chartists are less active, there is a unique equilibrium distribution which is stable. However, when the chartists become more active, a new equilibrium distribution will be generated and become stable. The corresponding stationary density will change from a single peak to a crater-like density. The change of stationary distribution is characterized by a bimodal logarithm price distribution and fat tails. The paper demonstrates that stochastic bifurcation theory is a useful tool in providing insight into various types of financial market behaviour in a stochastic environment. © 2008 Elsevier Ltd. All rights reserved

Does the market maker stabilize the market?

The market maker plays an important role in price formation, but his/her behavior and stabilizing impact on the market are relatively unclear, in particular in speculative markets. This paper develops a financial market model that examines the impact on market stability of the market maker, who acts as both a liquidity provider and an active investor in a market consisting of two types of boundedly rational speculative investors-the fundamentalists and trend followers. We show that the market maker does not necessarily stabilize the market when he/she actively manages the inventory to maximize profits, and that rather the market maker's impact depends on the behavior of the speculators. Numerical simulations show that the model is able to generate outcomes for asset returns and market inventories that are consistent with empirical findings. © 2009

On numerical solution of Fredholm and Hammerstein integral equations via Nystr\"{o}m method and Gaussian quadrature rules for splines

Nystr\"{o}m method is a standard numerical technique to solve Fredholm integral equations of the second kind where the integration of the kernel is approximated using a quadrature formula. Traditionally, the quadrature rule used is the classical polynomial Gauss quadrature. Motivated by the observation that a given function can be better approximated by a spline function of a lower degree than a single polynomial piece of a higher degree, in this work, we investigate the use of Gaussian rules for splines in the Nystr\"{o}m method. We show that, for continuous kernels, the approximate solution of linear Fredholm integral equations computed using spline Gaussian quadrature rules converges to the exact solution for $m \rightarrow \infty$, $m$ being the number of quadrature points. Our numerical results also show that, when fixing the same number of quadrature points, the approximation is more accurate using spline Gaussian rules than using the classical polynomial Gauss rules. We also investigate the non-linear case, considering Hammerstein integral equations, and present some numerical tests.RYC-2017-2264

Structure and morphology of an active conjugate relay zone, Messina Strait, southern Italy

Messina Strait is a narrow fault-bounded marine basin that separates the Calabrian peninsula from Sicily in southern Italy. It sits in a seismically active region where normal fault scarps and raised Quaternary marine terraces record ongoing extension driven by southeastward rollback of the Calabrian subduction zone. A review of published studies and new data shows that normal faults in the Messina Strait region define a conjugate relay zone where displacement is transferred along strike from NW-dipping normal faults in the northeast (southern Calabria) to the SE-dipping Messina-Taormina normal fault in the southwest (offshore eastern Sicily). The narrow marine strait is a graben undergoing active subsidence within the relay zone, where pronounced curvature of normal faults results from large strain gradients and clockwise rotations related to fault interactions. Based on regional fault geometries and published age constraints, we infer that normal faults in southern Calabria migrated northwest while normal faults in NE Sicily migrated southeast during the past ca. 2–2.5 Myr. This pattern has resulted in tectonic narrowing of the strait through time by inward migration of facing normal faults and rapid mantle-driven uplift