Exchange rate forecasts and stochastic trend breaks

University of Technology, Sydney. Faculty of Business.This thesis examines the forecastability of exchange rates in the presence of trend breaks. In particular, its focus is the predictive power of the interest rate differential for the exchange rate. Chapter 1 is the Introduction to the thesis. In this Chapter, I briefly review the relevant literature on exchange rate predictability, forecasting in the presence of structural breaks and modelling trends in exchange rate time series. Models are often evaluated via their out-of-sample forecasts over a single out-of-sample period. However, not all out-of-sample (OOS) periods are of equal difficulty - poor forecast performance of a model over a certain OOS period might actually be evidence in favour of the model if the OOS period was particularly difficult. In Chapter 2, I develop a way to quantify the difficulty of an OOS period affected by trend breaks. This method uses the deficit between the mean square forecast error of the optimal univariate forecast of the trend breaking process and the random walk forecast. This MSFE deficit is what needs to be made up by any extra information in a model in order to beat the random walk. In Chapter 2, I use the degree of difficulty measure in an ex-post analysis of the forecasts of a VEqCM over two separate periods. Chapter 3 shows that when an out-of-sample period has trend breaks, the forecast error densities generated from a recursive forecasting procedure can have a spurious multimodality at various horizons. This is clearly problematic for any statistics calculated from these densities - in particular, any forecast evaluation statistics or tests. It would also produce misleading value-at-risk calculations. I develop a limit theory explaining why this occurs. In the second half of the Chapter I show how the forecast error density can be disentangled from the trend breaks. This allows an estimate of the extent to which breaks have affected a particular forecast statistic. In Chapter 4 I use a general trend representation (from the work of P.C.B.Phillips) to model inter-break exchange rate behaviour. I show how this broken trend representation can be used to estimate the trend breaks in an exchange rate series. I show that with the general trend representation, only `large ' breaks are identified - i.e., small (potentially spurious) breaks can be modelled with an unbroken trend. In an empirical application to the AUD-GBP exchange rate, I find that the estimated breaks can be rationalized using some recent theory on the effect of monetary policy shocks on exchange rate trends. Chapter 5 concludes the thesis

Optimal traffic organisation in ants under crowded conditions

Efficient transportation, a hot topic in nonlinear science, is essential for modern societies and the survival of biological species. Biological evolution has generated a rich variety of successful solutions, which have inspired engineers to design optimized artificial systems. Foraging ants, for example, form attractive trails that support the exploitation of initially unknown food sources in almost the minimum possible time. However, can this strategy cope with bottleneck situations, when interactions cause delays that reduce the overall flow? Here, we present an experimental study of ants confronted with two alternative routes. We find that pheromone-based attraction generates one trail at low densities, whereas at a high level of crowding, another trail is established before traffic volume is affected, which guarantees that an optimal rate of food return is maintained. This bifurcation phenomenon is explained by a nonlinear modelling approach. Surprisingly, the underlying mechanism is based on inhibitory interactions. It implies capacity reserves, a limitation of the density-induced speed reduction, and a sufficient pheromone concentration for reliable trail perception. The balancing mechanism between cohesive and dispersive forces appears to be generic in natural, urban and transportation systems.Comment: For related work see http://www.helbing.or

Ants in a Labyrinth: A Statistical Mechanics Approach to the Division of Labour

Division of labour (DoL) is a fundamental organisational principle in human societies, within virtual and robotic swarms and at all levels of biological organisation. DoL reaches a pinnacle in the insect societies where the most widely used model is based on variation in response thresholds among individuals, and the assumption that individuals and stimuli are well-mixed. Here, we present a spatially explicit model of DoL. Our model is inspired by Pierre de Gennes' 'Ant in a Labyrinth' which laid the foundations of an entire new field in statistical mechanics. We demonstrate the emergence, even in a simplified one-dimensional model, of a spatial patterning of individuals and a right-skewed activity distribution, both of which are characteristics of division of labour in animal societies. We then show using a two-dimensional model that the work done by an individual within an activity bout is a sigmoidal function of its response threshold. Furthermore, there is an inverse relationship between the overall stimulus level and the skewness of the activity distribution. Therefore, the difference in the amount of work done by two individuals with different thresholds increases as the overall stimulus level decreases. Indeed, spatial fluctuations of task stimuli are minimised at these low stimulus levels. Hence, the more unequally labour is divided amongst individuals, the greater the ability of the colony to maintain homeostasis. Finally, we show that the non-random spatial distribution of individuals within biological and social systems could be caused by indirect (stigmergic) interactions, rather than direct agent-to-agent interactions. Our model links the principle of DoL with principles in the statistical mechanics and provides testable hypotheses for future experiments

Self-organized criticality and emergent oscillations in models of termite architecture with crowding.

The termite architecture model of O'Toole et'al. (1999) is extended to incorporate arbitrary halting time-scales. It is shown that this also means that the assumption of synchronous building must be relaxed. Numerical simulations show that ordered nest architecture emerges under a wide range of time-scales but also that there is an optimal region of halting times. This optimal region is explained by the emergence of synchronized periods of termite activity. The correlation length of the building distribution is shown to diverge providing strong evidence that the model is self-organized critical

Self-organized criticality in ant brood tending.

A new stochastic lattice gas model of ant brood tending is formulated to examine the role played by repulsive ant-ant interactions in the even distribution of care among brood members. The deterministic limit of the model is known to be self-organized critical. Numerical simulations of the model show that the ant-ant repulsion facilitates an even distribution of brood care in the middle of the brood. This provides a possible explanation for the fact that ants sort their brood so that the youngest brood (which are most in need of care) are placed in the middle. Simulations show that the uniformity of brood care distribution is optimal when ants operate in a regime intermediate between completely random and completely deterministic. A certain degree of randomness helps ants to avoid becoming trapped in suboptimal configurations but does not destroy the long-range correlations that are inherent to self-organized critical systems

Facial race and sex cues have a comparable influence on emotion recognition in Chinese and Australian participants

The magnitude of the happy categorisation advantage, the faster recognition of happiness than negative expressions, is influenced by facial race and sex cues. Previous studies have investigated these relationships using racial outgroups stereotypically associated with physical threat in predominantly Caucasian samples. To determine whether these influences generalise to stimuli representing other ethnic groups and to participants of different ethnicities, Caucasian Australian (Experiments 1 and 2) and Chinese participants (Experiment 2) categorised happy and angry expressions displayed on own-race male faces presented with emotional other-race male, own-race female, and other-race female faces in separate tasks. The influence of social category cues on the happy categorisation advantage was similar in the Australian and Chinese samples. In both samples, the happy categorisation advantage was present for own-race male faces when they were encountered with other-race male faces but reduced when own-race male faces were categorised along with female faces. The happy categorisation advantage was present for own-race and other-race female faces when they were encountered with own-race male faces in both samples. Results suggest similarity in the influence of social category cues on emotion categorisation

A novel protein isoform of the RON tyrosine kinase receptor transforms human pancreatic duct epithelial cells

The MST1R gene is overexpressed in pancreatic cancer producing elevated levels of the RON tyrosine kinase receptor protein. While mutations in MST1R are rare, alternative splice variants have been previously reported in epithelial cancers. We report the discovery of a novel RON isoform discovered in human pancreatic cancer. Partial splicing of exons 5 and 6 (P5P6) produces a RON isoform that lacks the first extracellular immunoglobulin-plexin-transcription (IPT) domain. The splice variant is detected in 73% of pancreatic adenocarcinoma patient derived xenografts and 71% of pancreatic cancer cell lines. Peptides specific to RON P5P6 detected in human pancreatic cancer specimens by mass spectrometry confirms translation of the protein isoform. The P5P6 isoform is found to be constitutively phosphorylated, present in the cytoplasm, and it traffics to the plasma membrane. Expression of P5P6 in immortalized human pancreatic duct epithelial (HPDE) cells activates downstream AKT, and in human pancreatic epithelial nestin-expressing (HPNE) cells activates both the AKT and MAPK pathways. Inhibiting RON P5P6 in HPDE cells using a small molecule inhibitor BMS-777607 blocked constitutive activation and decreased AKT signaling. P5P6 transforms NIH3T3 cells and induces tumorigenicity in HPDE cells. Resultant HPDE-P5P6 tumors develop a dense stromal compartment similar to that seen in pancreatic cancer. In summary, we have identified a novel and constitutively active isoform of the RON tyrosine kinase receptor that has transforming activity and is expressed in human pancreatic cancer. These findings provide additional insight into the biology of the RON receptor in pancreatic cancer and are clinically relevant to the study of RON as a potential therapeutic target