A comparative study of alternative approaches for common factors identification

Preliminary versionFor multivariate non-stationary time series modeling is essential to know the number of common factors that define the behavior of the series. The traditional way to approach this problem is to study the cointegration relations among data through tests of the trace or maximum eigenvalue, obtaining the number of stationary long-run relations. Alternatively this problem can be analyzed using dynamic factor models as in Peña and Poncela (2006), estimating in this case the number of all independent common factors, stationary or not, that describe the behavior of data. In this context, we analyze empirically the power of such alternative approaches by applying them to series simulated using known factorial models. The results show that when there are stationary common factors, when the number of observations is reduced and/or when the series have involved more than one cointegration relation, the common factor test is more powerful than the usual cointegration tests. These results together with the greater flexibility of dynamic factor models for identify the load matrix of the DGP make them more suitable for use in multivariate analysis

Term structure estimation, liquidity-induced heteroskedasticity and the price of liquidity risk

Desde la publicación del trabajo de Vasicek y Fong (1982) se ha generalizado el ajuste de la estructura temporal de tipos de interés asumiendo que los rendimientos son homocedásticos. En este trabajo se muestra que dicha hipótesis no se mantiene cuando los activos presentan diferencias en liquidez, incluso cuando se trata de bonos del mismo emisor. Un bajo volumen negociado implica una mayor volatilidad. Además, la existencia de discontinuidades en la negociación del precio de los bonos producirá mayor volatilidad en aquellos que se encuentren más próximos a vencimiento. Para mostrar estos efectos, se ha trabajado con bonos del Estado español desde 1988 hasta 2010, considerando más de 700 títulos y 5.000 días observados. Con estos datos se han estimado los errores fuera de la muestra para cada día y título observados. La varianza de estos errores está negativamente correlacionada con la rotación y la duración de cada título, mientras que la media del error está directamente correlacionada con la varianza estimada. Por todo ello, en este trabajo se propone un modelo modificado de Svensson (1994) para estimar la curva de tipos de interés añadiendo un término por liquidez y estimando los parámetros por mínimos cuadrados ponderados, teniendo en cuenta la heterocedasticidad inducida por liquidezSince the seminal paper of Vasicek and Fong (1982), the term structures of interest rates have been fitted assuming that yields are cross-sectionally homoskedastic. We show that this assumption does not hold when there are differences in liquidity, even for bonds of the same issuer. Lower turnover implies higher volatility. In addition, a minimum tick size for bond price negotiation will produce higher volatility for bonds approaching their maturity dates. To show these effects, we use data for Spanish sovereign bonds from 1988 to 2010, covering more than 700 bonds and 5000 trading days. We estimate the out-ofsample error for each bond and day. The variance of these errors is found to be negatively correlated with each bond’s turnover and duration, while the mean of the errors is found to be directly correlated with the estimated variance. As a result, we propose a modified Svensson (1994) yield curve model to fit the term structure, adding a liquidity term and estimating parameters by weighted least-squared errors to take into account the liquidity induced heteroskedasticit

The US actuarial balance model for the pay-as-you-go system and its application to Spain

The aim of this paper is to formulate an approximation of the US actuarial balance model and apply it to the Spanish public retirement pension system under various scenarios in order to determine a consistent indicator of the system's financial state comparable to those used by the most advanced social security systems. This will enable us to answer the question as to whether there is any justification for reforming the pension system in Spain. This type of actuarial balance uses projections to show future challenges to the financial side of the pension system deriving basically from ageing, the projected increase in longevity and fluctuations in economic activity. If one is compiled periodically it can provide various indicators to help depoliticize the management of the pay-as-you-go system by bringing the planning horizons of politicians and the system itself closer together

Genetic algorithm estimation of interest rate term

The term structure of interest rates is an instrument that gives us the necessary information for valuing deterministic financial cash flows, measuring the economic market expectations and testing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be measured by smoothing data obtained from asset prices through statistical techniques. Adjusting parsimonious functional forms - as proposed by Nelson and Siegel (1987) and Svensson (1994) - is the most popular technique. This method is based on bond yields to maturity and the high degree of non linearity of the functions to be optimised make it very sensitive to the initial values employed. In this context, this paper proposes the use of genetic algorithms to find these values and reduce the risk of false convergence, showing that stable time series parameters are obtained without the need to impose any kind of restriction

Genetic algorithm estimation of interest rate term structure

The term structure of interest rates is an instrument that gives us the necessary information for valuing deterministic financial cash flows, measuring the economic market expectations and testing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be measured by smoothing data obtained from asset prices through statistical techniques. Adjusting parsimonious functional forms ¿ as proposed by Nelson and Siegel (1987) and Svensson (1994) ¿ is the most popular technique. This method is based on bond yields to maturity and the high degree of non-linearity of the functions to be optimised make it very sensitive to the initial values employed. In this context, this paper proposes the use of genetic algorithms to find these values and reduce the risk of false convergence, showing that stable time series parameters are obtained without the need to impose any kind of restrictions

Avaliação de derivados sobre o clima a partir da modelagem estocástica da temperatura no aeroporto Eldorado de Bogotá

The weather and its effects have been two of the main fields of scientific discussion in recent years. In economics, that has meant greater analysis of the risks that the weather generates on the economy, in general, and on business activities, in particular. Therefore, financial derivative products have been developed, enabling economic agents to protect themselves against such risks. Some of the most customary weather derivatives include an underlying factor that is a city’s temperature measured at the airport. In that context, this article analyzes how such temperature derivatives can be applied to Eldorado International Airport. To do so, an Ornstein-Uhlenbeck mean reversion model is adjusted to the observed temperature, its validity is verified using simulation techniques, and diverse derivative products are assessed.El clima y sus efectos han sido dos de los principales campos de discusión científica en los últimos años. En el ámbito económico esto se ha traducido en un mayor análisis de los riesgos que el clima genera sobre la economía, en su conjunto, y sobre las actividades empresariales, en particular. A partir de ello se han desarrollado productos financieros derivados que les permiten a los agentes económicos cubrirse ante dichos riesgos. Algunos de los más habituales tienen como subyacente la temperatura de las ciudades, medida en sus aeropuertos. En este contexto, este trabajo analiza cómo estos productos derivados sobre la temperatura pueden aplicarse al Aeropuerto Eldorado. Para ello se ajusta a la temperatura observada un modelo Ornstein-Uhlenbeck de reversión a la media, se comprueba su validez mediante técnicas de simulación y se valoran diversos productos derivados.O clima e seus efeitos tem sido dois dos principais campos de discussão científica nos últimos anos. No âmbito econômico isto se traduz em uma maior análise dos riscos que o clima gera sobre a economia, em seu conjunto, e sobre as atividades empresariais, em particular. A partir disso têm sido desenvolvidos produtos financeiros derivados que permitem aos agentes econômicos proteger-se diante de tais riscos. Alguns dos mais comuns têm como subjacente a temperatura das cidades, medida em seus aeroportos. Neste contexto, este trabalho analisa como estes produtos derivados da temperatura podem ser aplicados ao aeroporto Eldorado. Para isso ajusta-se a temperatura observada a um modelo Ornstein-Uhlenbeck de reversão a média, comprova-se sua validade mediante técnicas de simulação e se avaliam os diversos produtos derivados

La hipótesis de las expectativas en el largo plazo: evidencia en el mercado español de deuda pública

En el presente trabajo se contrasta la Hipótesis de las Expectativas en los plazos más largos de la estructura temporal de tipos de interés. Para ello se aplica la metodología propuesta en Campbell y Shiller (1987, 1991), basada en la obtención de predicciones de los futuros cambios en los tipos de interés mediante un vector autorregresivo, a estimaciones no paramétricas de la curva de tipos cupón-cero. Los resultados muestran evidencia a favor de la Hipótesis de las Expectativas y que el diferencial de tipos es un buen estimador de los cambios futuros de los tipos de interés también en el largo plazo. (Copyright: Fundación SEPI)Estructura temporal de tipos de interés, teoría de las expectativas, mercado español de Deuda Pública, modelos VAR.