Factorising equity returns in an emerging market through exogenous shocks and capital flows

A technique from stochastic portfolio theory [Fernholz, 1998] is applied to analyse equity returns of Small, Mid and Large cap portfolios in an emerging market through periods of growth and regional crises, up to the onset of the global financial crisis. In particular, we factorize portfolios in the South African market in terms of distribution of capital, change of stock ranks in portfolios, and the effect due to dividends for the period Nov 1994 to May 2007. We discuss the results in the context of broader economic thinking to consider capital flows as risk factors, turning around more established approaches which use macroeconomic and socio-economic conditions to explain Foreign Direct Investment (into the economy) and Net Portfolio Investment (into equity and bond markets).Comment: 27 pages, 12 figure

On pricing kernels, information and risk

We discuss the finding that cross-sectional characteristic based models have yielded portfolios with higher excess monthly returns but lower risk than their arbitrage pricing theory counterparts in an analysis of equity returns of stocks listed on the JSE. Under the assumption of general no-arbitrage conditions, we argue that evidence in favour of characteristic based pricing implies that information is more likely assimilated by means of nonlinear pricing kernels for the markets considered.Comment: 20 pages, 3 figures, 1 tabl

High-speed detection of emergent market clustering via an unsupervised parallel genetic algorithm

We implement a master-slave parallel genetic algorithm (PGA) with a bespoke log-likelihood fitness function to identify emergent clusters within price evolutions. We use graphics processing units (GPUs) to implement a PGA and visualise the results using disjoint minimal spanning trees (MSTs). We demonstrate that our GPU PGA, implemented on a commercially available general purpose GPU, is able to recover stock clusters in sub-second speed, based on a subset of stocks in the South African market. This represents a pragmatic choice for low-cost, scalable parallel computing and is significantly faster than a prototype serial implementation in an optimised C-based fourth-generation programming language, although the results are not directly comparable due to compiler differences. Combined with fast online intraday correlation matrix estimation from high frequency data for cluster identification, the proposed implementation offers cost-effective, near-real-time risk assessment for financial practitioners.Comment: 10 pages, 5 figures, 4 tables, More thorough discussion of implementatio

Cosmic microwave background anisotropies: Nonlinear dynamics

We develop a new approach to local nonlinear effects in cosmic microwave background anisotropies, and discuss the qualitative features of these effects. New couplings of the baryonic velocity to radiation multipoles are found, arising from nonlinear Thomson scattering effects. We also find a new nonlinear shear effect on small angular scales. The full set of evolution and constraint equations is derived, including the nonlinear generalizations of the radiation multipole hierarchy, and of the dynamics of multi-fluids. These equations govern radiation anisotropies in any inhomogeneous spacetime, but their main application is to second-order effects in a universe that is close to the Friedmann models. Qualitative analysis is given here, and quantitative calculations are taken up in further papers.Comment: Revised version, with some important corrections and improved clarity, highlighting the new results on nonlinear Thomson scattering effects and nonlinear shear effects. To appear Phys Rev