Assessing multivariate predictors of financial market movements: A latent factor framework for ordinal data

Much of the trading activity in Equity markets is directed to brokerage houses. In exchange they provide so-called "soft dollars," which basically are amounts spent in "research" for identifying profitable trading opportunities. Soft dollars represent about USD 1 out of every USD 10 paid in commissions. Obviously they are costly, and it is interesting for an institutional investor to determine whether soft dollar inputs are worth being used (and indirectly paid for) or not, from a statistical point of view. To address this question, we develop association measures between what broker--dealers predict and what markets realize. Our data are ordinal predictions by two broker--dealers and realized values on several markets, on the same ordinal scale. We develop a structural equation model with latent variables in an ordinal setting which allows us to test broker--dealer predictive ability of financial market movements. We use a multivariate logit model in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments reveal that both the estimation method and the testing procedure perform well in small samples. The method is then used to analyze our dataset.Comment: Published in at http://dx.doi.org/10.1214/08-AOAS213 the Annals of Applied Statistics (http://www.imstat.org/aoas/) by the Institute of Mathematical Statistics (http://www.imstat.org

On the Analysis of Moral Hazard Using Experimental Studies

The term moral hazard generally implies individuals’ tendency to exercise less effort into cost reduction if the negative consequences resulting from their actions are not borne by themselves. This paper analyzes using recent experimental studies under which circumstances moral hazard is likely to occur and how this problem could be mitigated or eliminated. A detailed overview and analysis of field and laboratory experiments from different areas are provided. At first, a description of the experimental process is presented. The paper then concentrates on findings and, additionally, on the discussion of the ethodology. Overall, the results suggest moral hazard to be an important problem in many markets. However, it is found out that experts without personal financial incentives do not respond to customers’ insurance status. Besides, competition mitigates moral hazard on the supply side and evidence shows that moral hazard is less likely to occur in markets for natural disaster insurance where probabilities of damages are low. Additionally, peer pressure and pro-social preferences alleviate the problem of moral hazard in group schemes. Keywords: First-degree moral hazard; second-degree moral hazard; experiments; analysis

A latent factor model for ordinal data to measure multivariate predictive ability of financial market movements

In this paper we develop a structural equation model with latent variables in an ordinal setting which allows us to test broker-dealer predictive ability of financial market movements. We use a multivariate logit model in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments reveal that both the estimation method and the testing procedure perform well in small samples. An empirical illustration is given for mid-term forecasts simultaneously made by two broker-dealers for several countries.structural equation model, latent variable, generalised linear model, factor analysis, multinomial logit, forecasts, LAMLE, canonical correlation

Molecular dynamics of n-hexane: A quasi-elastic neutron scattering study on the bulk and spatially nanochannel-confined liquid

We present incoherent quasi-elastic neutron scattering measurements in a wavevector transfer range from 0.4 AA^{-1} to 1.6AA^{-1} on liquid n-hexane confined in cylindrical, parallel-aligned nanochannels of 6 nm mean diameter and 260 micrometer length in monolithic, mesoporous silicon. They are complemented with, and compared to, measurements on the bulk system in a temperature range from 50K to 250K. The time-of-flight spectra of the bulk liquid can be modeled by microscopic translational as well as fast localized rotational, thermally-excited, stochastic motions of the molecules. In the nano-confined state of the liquid, which was prepared by vapor condensation, we find two molecular populations with distinct dynamics, a fraction which is immobile on the time scale of 1ps to 100ps probed in our experiments and a second component with a self-diffusion dynamics slightly slower than observed for the bulk liquid. No hints of an anisotropy of the translational diffusion with regard to the orientation of the channels' long axes have been found. The immobile fraction amounts to about 5% at 250K, gradually increases upon cooling and exhibits an abrupt increase at 160K (20K below bulk crystallization), which indicates pore freezingComment: 10 pages, 7 figure

International Housing Markets, Unconventional Monetary Policy and the Zero Lower Bound

In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investors portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study. (authors' abstract)Series: Department of Economics Working Paper Serie

The shortage of safe assets in the US investment portfolio: Some international evidence

This paper develops a Bayesian Global VAR (GVAR) model to track the international transmission dynamics of two stylized shocks, namely a supply and demand shock to US-based safe assets. Our main findings can be summarized as follows. First, we find that (positive) supply-sided shocks lead to pronounced increases in economic activity which spills over to foreign countries. The impact of supply-sided shocks can also be seen for other quantities of interest, most notably equity prices and exchange rates in Europe. Second, a demand-sided shock leads to an appreciation of the US dollar and generally lower yields on US securities, forcing investors to shift their portfolios towards foreign fixed income securities. This yields sizable positive effects on US output, equity prices and a general decrease in financial market volatility.Series: Department of Economics Working Paper Serie

Bringing Social Justice and Human Rights Back In

This report contrasts how European institutional and civil society stakeholders “talk and practice” the Mediterranean into being. Based on extensive stakeholder consultations, it tends to confirm the finding of MEDRESET Work Package 1, namely that EU institutions construct the Mediterranean through three discursive practices: the Mediterranean as a space crucial for EU interests, as a dangerous space and as a diverse geopolitical space. In stark difference to this institutional imaginary, European civil society and grassroots actors are constructing the Mediterranean space through three different discursive practices, namely the Mediterranean as a space in which universal values are being violated; as a space that is economically, but not geopolitically or ideationally, dominated by the EU; and as one where civic space is shrinking and xenophobia, authoritarianism and “wall politics” are prevailing. To rebuild an equal Mediterranean space and a flexible, inclusive and responsive EU role in it, European stakeholders suggest two policy alternatives: a policy of social justice and human rights, and a policy of reconciliation