Stochastic Volatility and Pricing Bias in the Swedish OMX-Index Call Option Market

This paper investigates the pricing bias in the Swedish OMX-Index Option market and how a stochastic volatility affects European call option prices. The market is purely European and without dividends for the period studied. A CIR square-root process for the volatility is estimated with non-linear least square minimization, and stochastic volatility option prices are calculated through Fourier-Inversion. These call option prices are compared to Black-Scholes prices as well as observed market prices, and a well-defined bias structure between Stochastic Volatility prices and Black-Scholes prices is observed. With a dynamic hedging scheme, I demonstrate larger (ex ante) profits, excluding transaction costs, for traders using the stochastic volatility model rather than the Black-Scholes modelderivatives pricing; stochastic volatility; Fourier inversion

Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis

The growing interest in management of credit risk and estimation of default probabilities has given rise to a range of more or less elaborate credit risk models. Hall and Miles (1990) suggests an approach of estimating failure probabilities based solely on stock market prices. The approach has the advantage of simplicity but relies on market efficiency to hold. In this paper we suggest an extension to the Hall and Miles (1990) model using extreme value theory and apply the extended model to the Swedish financial sector and to individual Swedish banks. The 15 year long sample in our study covers the period of the Swedish banking crisis of the early 1990s. We find a close correspondence between changes in the estimated probabilities of failure and the actual credit events occuring. Credit ratings from major credit rating agencies, on the other hand, are shown to react much less and much slower to credit quality changes.banking crisis; default; credit risk; extreme value theory

The Market's View on the Probability of Banking Sector Failure: Cross-Country Comparisons

Considering the increasingly international banks of today, the health of a country's banking sector is crucial not only to the country's growth and prosperity but also to the rest of the international financial community. Early warning signals of a banking sector in trouble or a pending banking crisis would therefore be of great value to both banks, investors and banking regulators/supervisors world wide. Different warning signals exist and in this paper we investigate how the stock market can provide a market-based indicator of banking sector health. Hall and Miles (1990) suggests an approach of estimating default probabilities of individual banks using only their stock market valuations and volatilities. In this paper we apply an aggregated version of their approach to banking sectors around the world in both developed and emerging economies and study the market's assessment of the probability of systemic banking crises in these countries over the last decade, including the Asian Crisis 1997-98. In addition, we investigate whether there is a relationship between the probability of banking sector failure and institutional/structural features of the actual banking sector. The quality of governance and the degree of law and order in a country is found to be significantly negatively related to the market based failure probabilities as is an explicit deposit insurance during periods of crisis.banking sector; banking crisis; default probability; market discipline

Formal and informal systems in support of farmer management of agro-biodiversity: some policy challenges to consolidate lessons learned

The last decade has seen the emergence of a number of innovative community level initiatives in Asia, Africa and Latin America for agrobiodiversity development and conservation. Traditional knowledge systems form and integral part of many of these programs. However, there is still a considerable lack of awareness of the importance of traditional agrobiodiversity knowledge systems and of the successes of these new initiatives within formal science institutions. This paper will address a few issues that will need special attention if the successes of the new programs are to be consolidated and their developments shared in a broader perspective. The paper argues that further research is needed inter alia on: (a) approaches to encourage enable inter-cultural recognition and acceptance; (b) specific adjustments needed of national agricultural policy and national agricultural research systems to become supportive of local plant genetic resource management, and (c) different options for protection of traditional knowledge and of collective systems for conservation and development of biodiversity in a wider, non-IPR sense.Property rights, Biological diversity conservation,

The Age of Discipline: The Relevance of Age to the Reasonableness of Corporal Punishment

Bakgrund Tidigare studier belyser vikten av att företag integrerar marknadsfunktionen och logistikfunktionen, detta då en sådan integration leder till fördelar för företag. När funktionerna är integrerade kan företag bland annat möta kunders förväntningar vad gäller produkttillgänglighet och leveransservice på ett mer effektivt sätt än om funktionerna inte är integrerade. I dagsläget finns endast begränsade studier om hur integration mellan marknadsfunktioner och logistikfunktioner ser ut i praktiken. En empirisk kunskapslucka vad gäller integration mellan marknadsfunktioner och logistikfunktioner i svenska detaljhandelsföretag kunde således påvisas och det är dennakunskapslucka som legat till grund för denna studie. Syfte Denna studie syftar till att analysera om, och i så fall hur, marknadsfunktioner och logistikfunktioner inom svenska detaljhandelsföretag är integrerade. Genomförande För att uppnå syftet genomfördes intervjuer med medarbetare på marknadsfunktionen och logistikfunktionen inom tre svenska detaljhandelsföretag. Dessa företag var Cervera, Glitter och KappAhl. Vidare genomfördes observationer i två av respektive företags butiker för att undersöka produkttillgängligheten på aktuella kampanjvaror. I  samband med observationerna genomfördes intervjuer med företagens butikschefer. Slutligen intervjuades ett antal branschaktörer gällande deras erfarenheter av integration mellan marknadsfunktioner och logistikfunktioner inom detaljhandelsbranschen. Slutsats Enligt denna studie framgår att marknadsfunktioner och logistikfunktioner inom svenska detaljhandelsföretag till viss del kan anses integrerade men att integrationen kan förbättras. Funktionerna är främst integrerade genom att de utbyter dokument, delar på resurser, har en vilja att uppnå mål tillsammans, en gemensam vision samt har en gemensam planering. Under ett företags kampanjperiod är det framförallt av stor vikt med en effektiv integration mellan de två funktionerna då de behöver delge varandra information. Inom svenska detaljhandelsföretag påverkas integrationen mellan marknadsfunktionen och logistikfunktionen av organisationskultur, organisationsstruktur, kommunikation, informationssystem och funktionernas fysiska placering.Background Previous studies highlight the importance of integration between the marketing function and logistics function since it leads to several bene- fits for an organization. For example, an organization can in a more efficient way meet customers’ expectations regarding product availability and delivery service when the functions are integrated. It only exists limited studies on how integration between marketing functions and logistics functions appear in practice. An empirical gap in knowledge regarding integration between marketing functions and logistics functions in Swedish retail companies was detected. This knowledge gap has been the basis for this study. Aim This study aims to analyze whether or not the marketing functions and the logistics functions within Swedish retail companies are integrated, and in that case, to analyze how they are integrated. Execution To achieve the aim of this study, interviews were conducted with employyees of the marketing function and the logistics function within three Swedish retail companies. These companies were Cervera, Glitter and KappAhl. Observations were made in two of each company's stores to examine the availability of current campaign products. During the observations interviews were conducted with the stores manager. Finally, interviews were made with industry participants to investigate their experience of integration between marketing functions and logistics functions within the retail industry. Conclusion This study indicates that market functions and logistics functions within Swedish retail companies can be considered integrated to some extent but it also indicates that the integration can be improved. The functions are primarily integrated by exchanging documents, sharing resources, having a desire to achieve goals together and by sharing a vision and having a common planning. During periods with product campaigns it is important with an effective integration of the two functions since they need to share information. In Swedish retail companies the integration between the functions is affected by the organizational culture, organizational structure, communication, information systems and the physical placement of the functions

The Compass Rose Pattern of the Stock Market: How Does it Affect Parameter Estimates, Forecasts, and Statistical Tests?

A "compass rose" pattern sometimes appears when stock returns are plotted against themselves with a one-day lag, since stock prices move in discrete steps. In this paper, we perform a Monte Carlo study on simulated stock price series rounded in different ways to mirror the behavior of stocks on the Stockholm Stock Exchange. We find AR-GARCH parameter estimates to be affected by the discreteness imposed by rounding. Based on the compass rose and the discreteness, we investigate, theoretically and empirically, different possibilities of improving predictions of stock returns. The distributions of the BDS test as well as Savit and Green's dependability index are also influenced by the compass rose pattern. However, throughout the paper, we must impose unrealistically heavy rounding of the stock prices to find significant effects on our estimates, forecasts, and statistical tests.discrete prices; GARCH; forecasts; correlation integral statistics

A Simple Continuous Measure of Credit Risk

This paper introduces a simple continuous measure of credit risk that associates to each firm a risk parameter related to the firm's risk-neutral default intensity. These parameters can be computed from quoted bond prices and allow assignment of credit ratings much finer than those provided by various rating agencies. We estimate the risk measures on a daily basis for a sample of US firms and compare them with the corresponding ratings provided by Moody's and the distance to default measures calculated using the Merton (1974) model. The three measures group the sample of firms into various risk classes in a similar but far from identical way, possibly reflecting the models' different forecasting horizons. Among the three measures, the highest rank correlation is found between our continuous measure and Moody's ratings. The techniques in this paper can be used to extract the entire distribution of inter-temporal risk-neutral default intensities which is useful for time-to-default estimators as well as for pricing credit derivatives.

Influence of draw reins on the gate kinematics at the trot

Ett ofta angivet syfte vid olika former av träning inom både hoppning och dressyr är att påverka hästens rörelser och förmå hästen att bära mer vikt på bakdelen och avlasta frambenen. Om och hur detta sker har dock knappt alls utvärderats med objektiva metoder. Effekter av träning över längre tid har studerats med avseende på förändringar i gångartsmönstret men då har kraftmätningar har inte inkluderats. I andra studier har man konstaterat att tyngden av en ryttare ökar belastningen på hästens ben, och då särskilt frambenen. Endast en av dessa studier har dock givit indikation om att ryttaren har möjlighet att påverka belastningsförhållandena. En studie av gramantygelns inverkan på belastningsfördelningen mellan fram- och bakben kunde visa att gramantygel i kombination med vanlig tygel gav signifikant ökad såväl vertikal som propulsiv impuls i bakbenet (Roepstorff et al. 2002). Samtidigt gjordes även synkroniserade kinematiska registreringar. Från dessa har i följande arbete data från understödsfasen har valts ut och analyserats. Syftet är att utvärdera eventuella kinematiska effekter av gramantygeln samt att om möjligt upptäcka samband mellan kinetik och kinematik. Analys av kinematiska data visade att gramantygeln förändrade hals- och nackvinklarna. Påverkan på halsvinkeln var mer än tre gånger så stor med graman som enda tygel jämfört med i kombination med vanlig tygel. Frambenet fördes snabbare med graman, både ensam och i kombination, men signifikant ökad retraktion sågs enbart med endast graman. Kombinationen av tyglar gav ökad sträckning av lårleden under andra hälften av understödet. Graman som enda tygel gav inte samma förändring. Lårledvinkeln kan därför antas vara kopplad till bakbenets propulsiva impuls, då denna förändrades på likartat sätt. Med gramantygel som komplement till vanlig tygel sågs även ökad flexion av has, knä och höft under första delen av understödet samt ökad flexion av hasen och minskad lutning av bäckenet i understödsfasens mitt. Motsvarande mönster kunde ej ses med endast graman. Det kan tyda på att gramantygeln, men endast i kombination med vanlig tygel, kan bidra till ökad upplagring av elastisk energi i bakdelen, vilket sedan kan utnyttjas för ökad propulsiv kraft i slutet av understödet. Förändringarna kan också ha samband med ökad vertikal belastning av bakdelen

Essays on Financial Markets

This thesis consists of five empirical essays dealing with different issues related to financial markets. Chapter 2 studies a new multivariate technique, Orthogonal GARCH, of forecasting large covariance matrices based on GARCH models. Orthogonal GARCH is built on principal component analysis and makes the creation of positive definite covariance matrices of arbitrary size possible. An important drawback with Orthogonal GARCH is that it builds on assumptions that sometimes break down when some of the assets we model behave differently than the other assets, or when the time period considered is very volatile. For that reason, I have chosen to apply the Orthogonal GARCH model to the highly volatile Nordic stock markets during the Asian Crisis 1997-1998, using a number of different forecast evaluation techniques. The results from the different evaluation methods all indicate a better performance of the Orthogonal GARCH model compared to traditional unconditional forecasting techniques. Chapter 3 investigates the first multinational power exchange in the world, ''Nord Pool''. Nord Pool has existed since 1996 and has participants from Norway, Sweden, Finland, Denmark, and England. Both spot and futures are traded on the exchange and in this thesis, I investigate whether the futures contracts can be used to hedge short-term positions in the underlying spot market. This question is of particular interest in the electricity market, both because electricity cannot be stored, and because of the high volatility in the electricity markets compared to other financial markets. Minimum variance hedges are estimated in a number of different ways, and standard unconditional hedges are compared to conditional GARCH and moving average hedges in an out-of-sample fashion. The empirical results indicate some gains from hedging with futures, despite the lack of straightforward arbitrage possibilities in the electricity market. Chapter 4 searches for evidence of chaos and other nonlinearities in Swedish stock return series. Empirical evidence suggests that nonlinear models, including chaotic models, might explain the dynamics of a financial return series. In this thesis, we use the BDS test to determine which linear or nonlinear dependences are responsible for the observed rejection of the IID-hypothesis in the Swedish stock market. We look at monthly, daily and 15-minute return series and find clear evidence of nonlinearities in general but no evidence of chaos. Instead, most of the nonlinearities seem to be due to GARCH effects. Chapter 5 investigates the discrete nature of stock prices and how the minimum ''tick size'' on a stock exchange creates a ''compass rose'' pattern in a scatter plot of stock returns. The effect of the compass rose on estimates/forecasts as well as on tests for chaos is further studied. Simulations reveal some effects on AR-GARCH estimates as well as forecasts due to the discreteness. The same holds for correlation integral based tests for dependences; we find that large shifts in the null-distributions of the tests render these useless in detecting chaos and other dependences. We also show how non-stationarities and ''spurious'' dependences in the series are created by the discreteness, and how this gives rise to shifts in the null-distributions of the statistical tests. Chapter 6 studies the pricing of European call options when the underlying stock index (OMX-Index) volatility changes randomly over time. This differs from the Black-Scholes approach, where volatility is assumed to be constant. Stochastic Volatility option prices are calculated with the Fourier-Inversion method and process parameters are backed out from empirical market prices on the Swedish Exchange for Options and Other Derivative Securities (OM). Stochastic Volatility option prices are compared to Black-Scholes prices as well as to market prices, and both models overprice out-of-the-money and underprice in-the-money. A dynamic hedging strategy reveals some mispricing in this market, and risk-free profit possibilities exist if transaction costs are neglected