Live Cattle as a New Frontier in Commodity Markets

The goal of the paper is threefold. First, we present live cattle, an interesting semi-storable commodity which has not often been discussed in the literature. Second, we analyze the spot price trajectories of the US and Brazilian cattle markets over the period 2002-2013, using the first nearby Future as a proxy for the spot price. We find two distinct periods separated by a structural break in October 2007: a first period where Brazilian prices lead US prices, and a second period where both series are cointegrated. Third, in order to globally compare the two Futures markets, we introduce the notion of distance between forward curves and exhibit that not only do spot prices move together in the second period but also that the forward curves show a much higher level of integration, allowing for pair trading strategies

Diamonds and precious metals for reduction of Portfolio Tail Risk

We study the performance of diamonds compared to gold and other precious metals in mitigating the tail risk of a diversified equity market portfolio over the period June 2007 to October 2018. Our results display a diversification benefit of some diamond indices, which also improve the portfolio reward-to-risk ratio. To corroborate this evidence, we study the dependence structure and tail dependence of diamonds and a broad equity market portfolio and compare it to the dependence obtained with gold and other precious metals. Results from fitting a bivariate copula show that the average left tail dependence reaches its minimum when diamonds are used. We also show that using shares of diamond-mining companies does not provide the same benefits

A sentiment analysis approach to the prediction of market volatility

Prediction and quantification of future volatility and returns play an important role in financial modeling, both in portfolio optimisation and risk management. Natural language processing today allows one to process news and social media comments to detect signals of investors' confidence. We have explored the relationship between sentiment extracted from financial news and tweets and FTSE100 movements. We investigated the strength of the correlation between sentiment measures on a given day and market volatility and returns observed the next day. We found that there is evidence of correlation between sentiment and stock market movements. Moreover, the sentiment captured from news headlines could be used as a signal to predict market returns; we also found that the same does not apply for volatility. However, for the sentiment found in Twitter comments we obtained, in a surprising finding, a correlation coefficient of -0.7 (p < 0.05), which indicates a strong negative correlation between negative sentiment captured from the tweets on a given day and the volatility observed the next day. It is important to keep in mind that stock volatility rises greatly when the market collapses but not symmetrically so when it goes up (the so-called leverage effect). We developed an accurate classifier for the prediction of market volatility in response to the arrival of new information by deploying topic modeling, based on Latent Dirichlet Allocation, in order to extract feature vectors from a collection of tweets and financial news. The obtained features were used as additional input to the classifier. Thanks to the combination of sentiment and topic modeling even on modest (essentially personal) architecture our classifier achieved a directional prediction accuracy for volatility of 63%

Recent experiences of copper on the Shanghai futures exchange: Some lessons for warehouse monitoring

The Theory of Storage of Working (1949) and Brennan (1958) predicts that demand shocks reduce inventories, raise convenience yields and generate negative forward spreads. The goals of the paper are threefold: i) Analyze the Shanghai Exchange copper forward curves over the period 2008 when the trading volumes of metals Futures contracts grew in a remarkable manner; ii) Exhibit the unprecedented dynamics of the Shanghai Exchange copper forward curve ahead and at the time of the uncovering of the problem of forged warehouse receipts related to a large warehouse located in the Chinese port of Qingdao; iii) Show that the Theory of Storage is validated on this new Exchange over the period of analysis, with weaker results when exchange inventories are augmented by stockpiles of metals stored in ‘bonded warehouses’ with duties unpaid and no immediate availability for consumption. These findings may contribute to reinforce in the direction of policy makers messages on the importance of the constant scrutiny of the forward curve changes and the role of warehouse monitoring on the other hand

Mathematical Finance. Bachelier Congress 2000 : Selected Papers from the First World Congress of the Bachelier Finance Society, June 29-July 1, 2000

The Bachelier Society for Mathematical Finance, founded in 1996, held its 1st World Congress in Paris on June 28 to July 1, 2000, thus coinciding in time with the centenary of the thesis defence of Louis Bachelier. In his thesis Bachelier introduced Brownian motion as a tool for the analysis of financial markets as well as the exact definition of options, and this is widely considered the keystone for the emergence of mathematical finance as a scientific discipline. The prestigious list of plenary speakers in Paris included 2 Nobel laureates, Paul Samuelson and Robert Merton. Over 130 further selected talks were given in 3 parallel sessions, all well attended by the over 500 participants who registered from all continents

From measure changes to time changes in asset pricing

The goal of the paper is to review the last 35 years of continuous-time finance by focusing on two major advances: (i) The powerful elegance of the martingale representation for primitive assets and attainable contingent claims in more and more general settings, thanks to the probabilistic tool of probability change and the economic flexibility in the choice of the numéraire relative to which prices are expressed. This numéraire evolved over time from the money market account to a zero-coupon bond or a stock price, lastly to strictly positive quantities involved in the Libor or swap market models and making the pricing of caps or swaptions quite efficient. (ii) The persistent central role of Brownian motion in finance across the 20th century: even when the underlying asset price is a very general semi-martingale, the no-arbitrage assumption and Monroe theorem [Monroe, I., 1978. Processes that can be embedded in Brownian motion. Annals of Probability 6, 42–56] allow us to write it as Brownian motion as long as we are willing to change the time. The appropriate stochastic clock can be shown empirically to be driven by the cumulative number of trades, hence by market activity. Consequently, starting with a general multidimensional stochastic process S defined on a probability space (Ω, , P) and representing the prices of primitive securities, the no-arbitrage assumption allows, for any chosen numéraire, to obtain a martingale representation for S under a probability measure QS equivalent to P. This route will be particularly beneficiary for the pricing of complex contingent claims. Alternatively, changing the clock, i.e., changing the filtration (), we can recover the Brownian motion and normality of returns. In all cases martingales appear as the central representation of asset prices, either through a measure change or through a time change

Hedge funds: a copula approach for risk management

Book synopsis: The last five years have witnessed a great momentum in the research into measures of financial risk. After many years of ad-hoc and non-consistent measures, now the problem is finally well formulated and some useful and very user-friendly solutions have been proposed. These new measures of risk should be of great interest for investors, financial institutions as well as for regulators. Under the editorship of Professor Giorgio Szego of the University of Rome "La Sapienza", this book is a collection of the revised and updated papers from prestigious international specialists who are leaders in their field, amongst whom is Robert Engle, a newly-announced Nobel prize-winner in finance. These authors bring a broad perspective across a wide selection of topics, ranging from the critique of some currently used methods, like Value at Risk, to the presentation of some correct risk measures and of some advanced application The book provides a detailed and up-to-date reference for researchers within academia, and risk managers or financial engineers