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Journal articles on the topic 'Arbitrage Econometric models'

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Published: 10 December 2022

Last updated: 10 March 2023

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1

Lieu, Derming. "Estimation of empirical pricing equations for foreign-currency options: Econometric models vs. arbitrage-free models." International Review of Economics & Finance 6, no. 3 (January 1997): 259–86. http://dx.doi.org/10.1016/s1059-0560(97)90038-1.

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2

Sheng, Yankai, and Ding Ma. "Stock Index Spot–Futures Arbitrage Prediction Using Machine Learning Models." Entropy 24, no. 10 (October 13, 2022): 1462. http://dx.doi.org/10.3390/e24101462.

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With the development of quantitative finance, machine learning methods used in the financial fields have been given significant attention among researchers, investors, and traders. However, in the field of stock index spot–futures arbitrage, relevant work is still rare. Furthermore, existing work is mostly retrospective, rather than anticipatory of arbitrage opportunities. To close the gap, this study uses machine learning approaches based on historical high-frequency data to forecast spot–futures arbitrage opportunities for the China Security Index (CSI) 300. Firstly, the possibility of spot–futures arbitrage opportunities is identified through econometric models. Then, Exchange-Traded-Fund (ETF)-based portfolios are built to fit the movements of CSI 300 with the least tracking errors. A strategy consisting of non-arbitrage intervals and unwinding timing indicators is derived and proven profitable in a back-test. In forecasting, four machine learning methods are adopted to predict the indicator we acquired, namely Least Absolute Shrinkage and Selection Operator (LASSO), Extreme Gradient Boosting (XGBoost), Back Propagation Neural Network (BPNN), and Long Short-Term Memory neural network (LSTM). The performance of each algorithm is compared from two perspectives. One is an error perspective based on the Root-Mean-Squared Error (RMSE), Mean Absolute Percentage Error (MAPE), and goodness of fit (R2). Another is a return perspective based on the trade yield and the number of arbitrage opportunities captured. Finally, a performance heterogeneity analysis is conducted based on the separation of bull and bear markets. The results show that LSTM outperforms all other algorithms over the entire time period, with an RMSE of 0.00813, MAPE of 0.70 percent, R2 of 92.09 percent, and an arbitrage return of 58.18 percent. Meanwhile, in certain market conditions, namely both the bull market and bear market separately with a shorter period, LASSO can outperform.

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3

DE ALMEIDA, CAIO IBSEN RODRIGUES. "AFFINE PROCESSES, ARBITRAGE-FREE TERM STRUCTURES OF LEGENDRE POLYNOMIALS, AND OPTION PRICING." International Journal of Theoretical and Applied Finance 08, no. 02 (March 2005): 161–84. http://dx.doi.org/10.1142/s0219024905002949.

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Multivariate Affine term structure models have been increasingly used for pricing derivatives in fixed income markets. In these models, uncertainty of the term structure is driven by a state vector, while the short rate is an affine function of this vector. The model is characterized by a specific form for the stochastic differential equation (SDE) for the evolution of the state vector. This SDE presents restrictions on its drift term which rule out arbitrages in the market. In this paper we solve the following inverse problem: Suppose the term structure of interest rates is modelled by a linear combination of Legendre polynomials with random coefficients. Is there any SDE for these coefficients which rules out arbitrages? This problem is of particular empirical interest because the Legendre model is an example of factor model with clear interpretation for each factor, in which regards movements of the term structure. Moreover, the Affine structure of the Legendre model implies knowledge of its conditional characteristic function. From the econometric perspective, we propose arbitrage-free Legendre models to describe the evolution of the term structure. From the pricing perspective, we follow Duffie et al. [22] in exploring their conditional characteristic functions to obtain a computational tractable method to price fixed income derivatives.

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4

Pandher, Gurupdesh S. "ESTIMATION OF EXCESS RETURNS FROM DERIVATIVE PRICES AND TESTING FOR RISK NEUTRAL PRICING." Econometric Theory 17, no. 4 (July 27, 2001): 785–819. http://dx.doi.org/10.1017/s0266466601174062.

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This paper develops an econometric framework for (i) estimating excess returns of the security process from high frequency derivative prices, (ii) testing for risk neutral pricing, and (iii) measuring premiums outside the no-arbitrage pricing model. The estimator is constructed by applying quasi-likelihood and Feynman–Kac theory to the risk neutral contingent claims pricing model to generate the optimal orthogonality restriction. The strong consistency and asymptotic normality of the estimator are established in the context of a nonstationary underlying state process. These results further imply that the estimator is robust to distributional assumptions on the underlying asset process. The proposed approach is applicable to any arbitrary derivative security, does not require estimation of the risk neutral probability measure, and has application to spot rate bond pricing models. A controlled diagnostic study based on generating the S&P500 index and calls verifies the ability of the estimators to correctly estimate security excess returns and test for risk neutral pricing. The estimator is invariant to call strikes, and larger samples constructed by cycling over shorter maturity options can be used to reduce its variance.

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5

Barboza Martignone, Gustavo, Karl Behrendt, and Dimitrios Paparas. "Price Transmission Analysis of the International Soybean Market in a Trade War Context." Economies 10, no. 8 (August 19, 2022): 203. http://dx.doi.org/10.3390/economies10080203.

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This study analysed the dynamics of the international soybean market using econometric techniques and economic models to study the impacts of the US–China trade war. It considered the analysis of “spatial” (horizontal) price transmission during an approximately ten-year period from September 2009 to May 2019 using monthly time-series data. The research focused on the leaders in the international soybean market, namely, China, the USA, the EU, Brazil and Argentina. Several econometric techniques were employed. The stationarity of the price time series was determined using the augmented Dickey–Fuller (ADF) unit root test. Structural breaks were inferred using the ADF test with a breaks test and a Bai–Perron multiple break test. The long-term relation/cointegration amongst the series was determined using the Johansen cointegration test (1988), with the previous breaks input as dummy variables. The direction of the causality was inferred using the Granger causality test (1969). The long-term and short-term causal relations were determined using the vector autoregression model (VAR) and the vector error correction model (VECM). The results showed a highly efficient and cointegrated market. The incidents of the trade war, as represented by tariffs and subsidies, had minor effects on the market efficacy, cointegration and price transmission. The arbitrage process of the studied market managed to get around the tariffs. In other words, there was no empirical evidence to support the claim that the law of one price (LOOP) did not hold.

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6

Peel, David A., and Ioannis A. Venetis. "Smooth Transition Models and Arbitrage Consistency." Economica 72, no. 287 (August 2005): 413–30. http://dx.doi.org/10.1111/j.0013-0427.2005.00423.x.

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7

Neal, Robert. "Direct Tests of Index Arbitrage Models." Journal of Financial and Quantitative Analysis 31, no. 4 (December 1996): 541. http://dx.doi.org/10.2307/2331359.

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8

Tarelli, Andrea. "No-arbitrage one-factor term structure models in zero- or negative-lower-bound environments." Investment Management and Financial Innovations 17, no. 1 (March 25, 2020): 197–212. http://dx.doi.org/10.21511/imfi.17(1).2020.18.

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One-factor no-arbitrage term structure models where the instantaneous interest rate follows either the process proposed by Vasicek (1977) or by Cox, Ingersoll, and Ross (1985), commonly known as CIR, are parsimonious and analytically tractable. Models based on the original CIR process have the important characteristic of allowing for a time-varying conditional interest rate volatility but are undefined in negative interest rate environments. A Shifted-CIR no-arbitrage term structure model, where the instantaneous interest rate is given by the sum of a constant lower bound and a non-negative CIR-like process, allows for negative yields and benefits from similar tractability of the original CIR model. Based on the U.S. and German yield curve data, the Vasicek and Shifted-CIR specifications, both considering constant and time-varying risk premia, are compared in terms of information criteria and forecasting ability. Information criteria prefer the Shifted-CIR specification to models based on the Vasicek process. It also provides similar or better in-sample and out-of-sample forecasting ability of future yield curve movements. Introducing a time variation of the interest rate risk premium in no-arbitrage one-factor term structure models is instead not recommended, as it provides worse information criteria and forecasting performance.

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9

Backus, David, Silverio Foresi, and Stanley Zin. "Arbitrage Opportunities in Arbitrage-Free Models of Bond Pricing." Journal of Business & Economic Statistics 16, no. 1 (January 1998): 13. http://dx.doi.org/10.2307/1392012.

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10

Cornet, Bernard, and Lionel De Boisdeffre. "Elimination of arbitrage states in asymmetric information models." Economic Theory 38, no. 2 (March 13, 2007): 287–93. http://dx.doi.org/10.1007/s00199-007-0205-z.

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11

Jouini, Elyès, and Clotilde Napp. "Arbitrage with Fixed Costs and Interest Rate Models." Journal of Financial and Quantitative Analysis 41, no. 4 (December 2006): 889–913. http://dx.doi.org/10.1017/s0022109000002684.

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AbstractWe study securities market models with fixed costs. We first characterize the absence of arbitrage opportunities and provide fair pricing rules. We then apply these results to extend some popular interest rate and option pricing models that present arbitrage opportunities in the absence of fixed costs. In particular, we prove that the quite striking result obtained by Dybvig, Ingersoll, and Ross (1996), which asserts that under the assumption of absence of arbitrage long zero-coupon rates can never fall, is no longer true in models with fixed costs, even arbitrarily small fixed costs. For instance, models in which the long-term rate follows a diffusion process are arbitrage-free in the presence of fixed costs (including arbitrarily small fixed costs). We also rationalize models with partially absorbing or reflecting barriers on the price processes. We propose a version of the Cox, Ingersoll, and Ross (1985) model which, consistent with Longstaff (1992), produces yield curves with realistic humps, but does not assume an absorbing barrier for the short-term rate. This is made possible by the presence of (even arbitrarily small) fixed costs.

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12

BAYRAKTAR, ERHAN, and H. VINCENT POOR. "ARBITRAGE IN FRACTAL MODULATED BLACK–SCHOLES MODELS WHEN THE VOLATILITY IS STOCHASTIC." International Journal of Theoretical and Applied Finance 08, no. 03 (May 2005): 283–300. http://dx.doi.org/10.1142/s0219024905003037.

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In this paper an arbitrage strategy is constructed for the modified Black–Scholes model driven by fractional Brownian motion or by a time changed fractional Brownian motion, when the volatility is stochastic. This latter property allows the heavy tailedness of the log returns of the stock prices to be also accounted for in addition to the long range dependence introduced by the fractional Brownian motion. Work has been done previously on this problem for the case with constant "volatility" and without a time change; here these results are extended to the case of stochastic volatility models when the modulator is fractional Brownian motion or a time change of it. (Volatility in fractional Black–Scholes models does not carry the same meaning as in the classic Black–Scholes framework, which is made clear in the text.) Since fractional Brownian motion is not a semi-martingale, the Black–Scholes differential equation is not well-defined sense for arbitrary predictable volatility processes. However, it is shown here that any almost surely continuous and adapted process having zero quadratic variation can act as an integrator over functions of the integrator and over the family of continuous adapted semi-martingales. Moreover it is shown that the integral also has zero quadratic variation, and therefore that the integral itself can be an integrator. This property of the integral is crucial in developing the arbitrage strategy. Since fractional Brownian motion and a time change of fractional Brownian motion have zero quadratic variation, these results are applicable to these cases in particular. The appropriateness of fractional Brownian motion as a means of modeling stock price returns is discussed as well.

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13

Jochmans, Koen. "A PORTMANTEAU TEST FOR CORRELATION IN SHORT PANELS." Econometric Theory 36, no. 6 (July 22, 2019): 1159–66. http://dx.doi.org/10.1017/s0266466619000203.

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Inoue and Solon (2006, Econometric Theory 22, 835–851) presented a test against serial correlation of arbitrary form in fixed-effect models for short panel data. Implementing the test requires choosing a regularization parameter that may severely affect power and for which no optimal selection rule is available. We present a modified version of their test that does not require any regularization parameter. Asymptotic power calculations illustrate the improvement of our procedure. An extension of the approach that accommodates dynamic models is also provided.

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14

Beare, Brendan K., and Juwon Seo. "TIME IRREVERSIBLE COPULA-BASED MARKOV MODELS." Econometric Theory 30, no. 5 (April 16, 2014): 923–60. http://dx.doi.org/10.1017/s0266466614000115.

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Economic and financial time series frequently exhibit time irreversible dynamics. For instance, there is considerable evidence of asymmetric fluctuations in many macroeconomic and financial variables, and certain game theoretic models of price determination predict asymmetric cycles in price series. In this paper, we make two primary contributions to the econometric literature on time reversibility. First, we propose a new test of time reversibility, applicable to stationary Markov chains. Compared to existing tests, our test has the advantage of being consistent against arbitrary violations of reversibility. Second, we explain how a circulation density function may be used to characterize the nature of time irreversibility when it is present. We propose a copula-based estimator of the circulation density and verify that it is well behaved asymptotically under suitable regularity conditions. We illustrate the use of our time reversibility test and circulation density estimator by applying them to five years of Canadian gasoline price markup data.

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15

Paule-Vianez, Jessica, Camilo Prado-Román, and Raúl Gómez-Martínez. "Monetary policy uncertainty and stock market returns: influence of limits to arbitrage and the economic cycle." Studies in Economics and Finance 37, no. 4 (October 19, 2020): 777–98. http://dx.doi.org/10.1108/sef-04-2020-0102.

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Purpose This paper aims to examine the impact that monetary policy uncertainty (MPU) has on stock market returns by taking into account limits to arbitrage and the economic cycle. Design/methodology/approach Using four news-based MPU measures, regression models have been applied in this study over a sample period from January 1985 to March 2020. The limits to arbitrage have been considered by taking Russell 1000 Value, Russell 1000 Growth, Russell 2000 Value and Russell 2000 Growth indices, and business cycles were established following the National Bureau of Economic Research. Findings A negative MPU impact on stock returns has been found. In particular, the most subjective and difficult to arbitrate stocks have been more sensitive to MPU. However, it could not be concluded that MPU has a greater or lesser impact on stock returns depending on the economic cycle. Practical implications The findings obtained are particularly useful for monetary policymakers showing the importance and need for greater control over the transparency of their decisions to maintain the stability of financial markets. The findings obtained are also useful for investors when selecting their investment assets at times of the highest MPU. Originality/value To the best of the authors’ knowledge, this is one of the few studies investigating the effect of MPU on stock market returns, and the first to analyse this relationship taking into account the economic cycle and limits to arbitrage.

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16

Hölzermann, Julian. "Term structure modeling under volatility uncertainty." Mathematics and Financial Economics 16, no. 2 (November 4, 2021): 317–43. http://dx.doi.org/10.1007/s11579-021-00310-4.

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AbstractIn this paper, we study term structure movements in the spirit of Heath et al. (Econometrica 60(1):77–105, 1992) under volatility uncertainty. We model the instantaneous forward rate as a diffusion process driven by a G-Brownian motion. The G-Brownian motion represents the uncertainty about the volatility. Within this framework, we derive a sufficient condition for the absence of arbitrage, known as the drift condition. In contrast to the traditional model, the drift condition consists of several equations and several market prices, termed market price of risk and market prices of uncertainty, respectively. The drift condition is still consistent with the classical one if there is no volatility uncertainty. Similar to the traditional model, the risk-neutral dynamics of the forward rate are completely determined by its diffusion term. The drift condition allows to construct arbitrage-free term structure models that are completely robust with respect to the volatility. In particular, we obtain robust versions of classical term structure models.

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17

JARROW, ROBERT. "BUBBLES AND MULTIPLE-FACTOR ASSET PRICING MODELS." International Journal of Theoretical and Applied Finance 19, no. 01 (February 2016): 1650007. http://dx.doi.org/10.1142/s0219024916500072.

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This paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.

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18

Gagliardini, Patrick, and Diego Ronchetti. "Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance*." Journal of Financial Econometrics 18, no. 2 (April 19, 2019): 333–94. http://dx.doi.org/10.1093/jjfinec/nbz013.

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Abstract We compare nonnested parametric specifications of the stochastic discount factor (SDF) using the conditional Hansen–Jagannathan (HJ-) distance. This distance measures the discrepancy between a parametric model-implied SDF and the admissible SDF’s satisfying all the conditional (dynamic) no-arbitrage restrictions, instead of just few unconditional no-arbitrage restrictions for managed portfolios chosen through the instrument selection. We estimate the conditional HJ-distance by a generalized method of moments estimator and establish its large sample properties for model selection purposes. We compare empirically several SDF models including multifactor beta pricing specifications and some recently proposed SDF models that are conditionally linear in consumption growth.

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19

Amin, Kaushik I., and Andrew J. Morton. "Implied volatility functions in arbitrage-free term structure models." Journal of Financial Economics 35, no. 2 (April 1994): 141–80. http://dx.doi.org/10.1016/0304-405x(94)90002-7.

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20

Doukas, John A., Chansog (Francis) Kim, and Christos Pantzalis. "Arbitrage Risk and Stock Mispricing." Journal of Financial and Quantitative Analysis 45, no. 4 (August 2010): 907–34. http://dx.doi.org/10.1017/s0022109010000293.

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AbstractIn this paper we examine the relation between equity mispricing and arbitrage risk and find that stocks with high arbitrage risk have higher estimated mispricing than stocks with low arbitrage risk. These results are not limited to high book-to-market or small capitalization stocks, and they are not sensitive to transaction and short-selling costs. In addition, they remain robust to alternative multifactor return generating specification models and mispricing measures. Overall, our empirical results are consistent with the conjecture that mispricing is a manifestation of the inability of arbitrageurs to hedge idiosyncratic risk, a major deterrent to arbitrage activity.

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21

Berliant, Marcus, and Daniel P. McMillen. "Hedonism vs. nihilism: No arbitrage and tests of urban economic models." Regional Science and Urban Economics 36, no. 1 (January 2006): 118–31. http://dx.doi.org/10.1016/j.regsciurbeco.2005.06.005.

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22

Christensen, Jens H. E., Francis X. Diebold, and Glenn D. Rudebusch. "The affine arbitrage-free class of Nelson–Siegel term structure models." Journal of Econometrics 164, no. 1 (September 2011): 4–20. http://dx.doi.org/10.1016/j.jeconom.2011.02.011.

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23

Fletcher, Jonathan. "Arbitrage and the Evaluation of Linear Factor Models in UK Stock Returns." Financial Review 45, no. 2 (May 2010): 449–68. http://dx.doi.org/10.1111/j.1540-6288.2010.00255.x.

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24

Harding, Matthew C. "Explaining the single factor bias of arbitrage pricing models in finite samples." Economics Letters 99, no. 1 (April 2008): 85–88. http://dx.doi.org/10.1016/j.econlet.2007.06.001.

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25

Carriero, Andrea. "FORECASTING THE YIELD CURVE USING PRIORS FROM NO-ARBITRAGE AFFINE TERM STRUCTURE MODELS*." International Economic Review 52, no. 2 (April 25, 2011): 425–59. http://dx.doi.org/10.1111/j.1468-2354.2011.00634.x.

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26

Frittelli, Marco. "SOME REMARKS ON ARBITRAGE AND PREFERENCES IN SECURITIES MARKET MODELS." Mathematical Finance 14, no. 3 (July 2004): 351–57. http://dx.doi.org/10.1111/j.0960-1627.2004.00194.x.

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27

SKIADOPOULOS, GEORGE. "VOLATILITY SMILE CONSISTENT OPTION MODELS: A SURVEY." International Journal of Theoretical and Applied Finance 04, no. 03 (June 2001): 403–37. http://dx.doi.org/10.1142/s021902490100105x.

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The developing literature on "smile consistent" no-arbitrage models has emerged from the need to price and hedge exotic options consistently with the prices of standard European options. This survey paper describes the steps through which this literature has evolved by providing a taxonomy of the various models. It highlights the main ideas behind the different models, and it outlines their advantages and limitations. Practical issues in implementing the models are also discussed.

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28

Latini, Luca, Marco Piccirilli, and Tiziano Vargiolu. "Mean-reverting no-arbitrage additive models for forward curves in energy markets." Energy Economics 79 (March 2019): 157–70. http://dx.doi.org/10.1016/j.eneco.2018.03.001.

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29

Lustig, Hanno, Andreas Stathopoulos, and Adrien Verdelhan. "The Term Structure of Currency Carry Trade Risk Premia." American Economic Review 109, no. 12 (December 1, 2019): 4142–77. http://dx.doi.org/10.1257/aer.20180098.

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Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases. Across developed countries, the local currency term premia, which increase with the maturity of the bonds, offset the currency risk premia. Similarly, in the time-series, the predictability of foreign bond returns in dollars declines with the bonds’ maturities. Leading no-arbitrage models in international finance do not match the downward term structure of currency carry trade risk premia. We derive a simple preference-free condition that no-arbitrage models need to reproduce in the absence of carry trade risk premia on long-term bonds. (JEL E43, G12, G15)

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30

Cummins, J. David. "Asset Pricing Models and Insurance Ratemaking." ASTIN Bulletin 20, no. 2 (November 1990): 125–66. http://dx.doi.org/10.2143/ast.20.2.2005438.

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AbstractThis paper provides an introduction to asset pricing theory and its applications in non-life insurance. The first part of the paper presents a basic review of asset pricing models, including discrete and continuous time capital asset pricing models (the CAPM and ICAPM), arbitrage pricing theory (APT), and option pricing theory (OPT). The second part discusses applications in non-life insurance. Among the insurance models reviewed are the insurance CAPM, discrete time discounted cash flow models, option pricing models, and more general continuous time models. The paper concludes that the integration of actuarial and financial theory can provide major advances in insurance pricing and financial management.

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Teker, Suat, and Oscar Varela. "A comparative analysis of security pricing using factor, macrovariable and arbitrage pricing models." Journal of Economics and Finance 22, no. 2-3 (June 1998): 21–41. http://dx.doi.org/10.1007/bf02771474.

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Buraschi, Andrea, and Francesco Corielli. "Risk management implications of time-inconsistency: Model updating and recalibration of no-arbitrage models." Journal of Banking & Finance 29, no. 11 (November 2005): 2883–907. http://dx.doi.org/10.1016/j.jbankfin.2005.02.002.

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Jardet, Caroline, Alain Monfort, and Fulvio Pegoraro. "No-arbitrage Near-Cointegrated VAR(p) term structure models, term premia and GDP growth." Journal of Banking & Finance 37, no. 2 (February 2013): 389–402. http://dx.doi.org/10.1016/j.jbankfin.2012.09.003.

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Aït-Sahalia, Yacine, Chenxu Li, and Chen Xu Li. "Implied Stochastic Volatility Models." Review of Financial Studies 34, no. 1 (March 30, 2020): 394–450. http://dx.doi.org/10.1093/rfs/hhaa041.

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Abstract This paper proposes “implied stochastic volatility models” designed to fit option-implied volatility data and implements a new estimation method for such models. The method is based on explicitly linking observed shape characteristics of the implied volatility surface to the coefficient functions that define the stochastic volatility model. The method can be applied to estimate a fully flexible nonparametric model, or to estimate by the generalized method of moments any arbitrary parametric stochastic volatility model, affine or not. Empirical evidence based on S&P 500 index options data show that the method is stable and performs well out of sample.

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35

Perron, Pierre, and Yohei Yamamoto. "A NOTE ON ESTIMATING AND TESTING FOR MULTIPLE STRUCTURAL CHANGES IN MODELS WITH ENDOGENOUS REGRESSORS VIA 2SLS." Econometric Theory 30, no. 2 (October 10, 2013): 491–507. http://dx.doi.org/10.1017/s0266466613000388.

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This note provides a simple proof for the problem of estimating and testing for multiple breaks in a single equation framework with regressors that are endogenous. We show based on standard assumptions about the regressors, instruments, and errors that the second-stage regression of the instrumental variable procedure involves regressors and errors that satisfy all the assumptions in Perron and Qu (2006, Journal of Econometrics 134, 373–399) so that the results about consistency, rate of convergence and limit distributions of the estimates of the break dates, in addition to the limit distributions of the tests, are obtained as simple consequences. The results are obtained within a unified framework for various cases about the nature of the reduced form: stable, no structural changes but time variations in the parameters, structural changes at dates that are common to those of the structural form, and structural changes occurring at arbitrary dates.

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Hall, Stephen G., P. A. V. B. Swamy, and George S. Tavlas. "TIME-VARYING COEFFICIENT MODELS: A PROPOSAL FOR SELECTING THE COEFFICIENT DRIVER SETS." Macroeconomic Dynamics 21, no. 5 (January 20, 2016): 1158–74. http://dx.doi.org/10.1017/s1365100515000279.

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Coefficient drivers are observable variables that feed into time-varying coefficients (TVCs) and explain at least part of their movement. To implement the TVC approach, the drivers are split into two subsets, one of which is correlated with the bias-free coefficient that we want to estimate and the other with the misspecification in the model. This split, however, can appear to be arbitrary. We provide a way of splitting the drivers that takes account of any nonlinearity that may be present in the data, with the aim of removing the arbitrary element in driver selection. We also provide an example of the practical use of our method by applying it to modeling the effect of ratings on sovereign-bond spreads.

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37

Teichmann, Josef, and Mario V. Wüthrich. "CONSISTENT YIELD CURVE PREDICTION." ASTIN Bulletin 46, no. 2 (February 5, 2016): 191–224. http://dx.doi.org/10.1017/asb.2015.30.

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AbstractWe present an arbitrage-free non-parametric yield curve prediction model which takes the full discretized yield curve data as input state variable. Absence of arbitrage is a particularly important model feature for prediction models in case of highly correlated data as, for instance, interest rates. Furthermore, the model structure allows to separate constructing the daily yield curve from estimating its volatility structure and from calibrating the market prices of risk. The empirical part includes tests on modeling assumptions, out-of-sample back-testing and a comparison with the Vasiček (1977) short-rate model.

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38

Antweiler, Werner. "Microeconomic models of electricity storage: Price Forecasting, arbitrage limits, curtailment insurance, and transmission line utilization." Energy Economics 101 (September 2021): 105390. http://dx.doi.org/10.1016/j.eneco.2021.105390.

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RUDEBUSCH, GLENN D., and TAO WU. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models." Journal of Money, Credit and Banking 39, no. 2-3 (March 2007): 395–422. http://dx.doi.org/10.1111/j.0022-2879.2007.00030.x.

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Myers, James N. "Implementing Residual Income Valuation With Linear Information Dynamics." Accounting Review 74, no. 1 (January 1, 1999): 1–28. http://dx.doi.org/10.2308/accr.1999.74.1.1.

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Residual income (RI) valuation is a method of estimating firm value based on expected future accounting numbers. This study documents the necessity of using linear information models (LIMs) of the time series of accounting numbers in valuation. I find that recent studies that make ad hoc modifications to the LIMs contain internal inconsistencies and violate the no arbitrage assumption. I outline a method for modifying the LIMs while preserving internal consistency. I also find that when estimated as a time series, the LIMs of Ohlson (1995), and Feltham and Ohlson (1995) provide value estimates no better than book value alone. By comparing the implied price coefficients to coefficients from a price level regression, I find that the models imply inefficient weightings on the accounting numbers. Furthermore, the median conservatism parameter of Feltham and Ohlson (1995) is significantly negative, contrary to the model's prediction, for even the most conservative firms. To explain these failures, I estimate a LIM from a more carefully modeled accounting system that provides two parameters of conservatism (the income parameter and the book value parameter). However, this model also fails to capture the true stochastic relationship among accounting variables. More complex models tend to provide noisier estimates of firm value than more parsimonious models.

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CARMONA, RENÉ, and SERGEY NADTOCHIY. "TANGENT MODELS AS A MATHEMATICAL FRAMEWORK FOR DYNAMIC CALIBRATION." International Journal of Theoretical and Applied Finance 14, no. 01 (February 2011): 107–35. http://dx.doi.org/10.1142/s0219024911006280.

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Motivated by the desire to integrate repeated calibration procedures into a single dynamic market model, we introduce the notion of a "tangent model" in an abstract set up, and we show that this new mathematical paradigm accommodates all the recent attempts to study consistency and absence of arbitrage in market models. For the sake of illustration, we concentrate on the case when market quotes provide the prices of European call options for a specific set of strikes and maturities. While reviewing our recent results on dynamic local volatility and tangent Lévy models, we present a theory of tangent models unifying these two approaches and construct a new class of tangent Lévy models, which allows the underlying to have both continuous and pure jump components.

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SCHMIDT, THORSTEN, and JERZY ZABCZYK. "CDO TERM STRUCTURE MODELLING WITH LÉVY PROCESSES AND THE RELATION TO MARKET MODELS." International Journal of Theoretical and Applied Finance 15, no. 01 (February 2012): 1250008. http://dx.doi.org/10.1142/s0219024911006462.

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This paper considers the modelling of collateralized debt obligations (CDOs). We propose a top-down model via forward rates generalizing Filipović, Overbeck and Schmidt (2009) to the case where the forward rates are driven by a finite dimensional Lévy process. The contribution of this work is twofold: we provide conditions for absence of arbitrage in this generalized framework. Furthermore, we study the relation to market models by embedding them in the forward rate framework in spirit of Brace, Gatarek and Musiela (1997).

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GAPEEV, PAVEL V., and MONIQUE JEANBLANC. "CREDIT DEFAULT SWAPS IN TWO-DIMENSIONAL MODELS WITH VARIOUS INFORMATIONS FLOWS." International Journal of Theoretical and Applied Finance 23, no. 02 (March 2020): 2050010. http://dx.doi.org/10.1142/s0219024920500107.

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We study a credit risk model of a financial market in which the dynamics of intensity rates of two default times are described by linear combinations of three independent geometric Brownian motions. The dynamics of two default-free risky asset prices are modeled by two geometric Brownian motions which are dependent of the ones describing the default intensity rates. We obtain closed form expressions for the no-arbitrage prices of both risk-free and risky credit default swaps given the reference filtration initially and progressively enlarged by the two default times. The accessible default-free reference filtration is generated by the standard Brownian motions driving the model.

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Focardi, Sergio M., Frank J. Fabozzi, and Ivan K. Mitov. "A new approach to statistical arbitrage: Strategies based on dynamic factor models of prices and their performance." Journal of Banking & Finance 65 (April 2016): 134–55. http://dx.doi.org/10.1016/j.jbankfin.2015.10.005.

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Coën, Alain, Raphaël Languillon, Arnaud Simon, and Saadallah Zaiter. "Financialisation and participation in the metropolisation dynamics of European-listed property companies." Journal of European Real Estate Research 13, no. 2 (June 10, 2020): 223–42. http://dx.doi.org/10.1108/jerer-10-2019-0035.

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Purpose This paper aims to explore the relationship between the financialisation dynamics of listed property companies (LPCs) and their participation in the metropolisation dynamics, in ten European countries between 2000 and 2017. The study takes place in a context of globalised real estate markets and modification of traditional urban economics. Design/methodology/approach The measure of financialisation corresponds to a beta increase, in the sense of the capital asset pricing model, and is corroborated by an informativeness index. LPC-owned properties are classified along two spatial segmentations. Panel models are used to analyse the relation between financial and urban hierarchies (through building arbitrages). Findings Financialisation is generally associated with a decrease in the number of assets owned, especially in the Netherlands and the UK, whereas non-financialised companies tend to increase their number of assets, especially in “flight-to-quality” countries such as Germany and Switzerland. In the first case, non-urban spaces and small and medium urban areas are arbitraged in favour of urban cores and metropoles. In the second, investments are reallocated towards hinterlands and the lower segments of the urban hierarchy. Over the study period, the parallelism between the financial hierarchy and the urban hierarchy was reinforced. Spain illustrates the risks of this evolution, whereas Sweden and Belgium present specificities. Originality/value This paper illustrates how LPCs function as transmitting channels in the new spatial and urban organisation.

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Dokuchaev, N. "Mean-reverting discrete time market models: speculative opportunities and absence of arbitrage." IMA Journal of Management Mathematics 23, no. 1 (October 7, 2010): 17–27. http://dx.doi.org/10.1093/imaman/dpq015.

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Bhattacharya, Debopam. "The Empirical Content of Binary Choice Models." Econometrica 89, no. 1 (2021): 457–74. http://dx.doi.org/10.3982/ecta16801.

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An important goal of empirical demand analysis is choice and welfare prediction on counterfactual budget sets arising from potential policy interventions. Such predictions are more credible when made without arbitrary functional‐form/distributional assumptions, and instead based solely on economic rationality, that is, that choice is consistent with utility maximization by a heterogeneous population. This paper investigates nonparametric economic rationality in the empirically important context of binary choice. We show that under general unobserved heterogeneity, economic rationality is equivalent to a pair of Slutsky‐like shape restrictions on choice‐probability functions. The forms of these restrictions differ from Slutsky inequalities for continuous goods. Unlike McFadden–Richter's stochastic revealed preference, our shape restrictions (a) are global, that is, their forms do not depend on which and how many budget sets are observed, (b) are closed form, hence easy to impose on parametric/semi/nonparametric models in practical applications, and (c) provide computationally simple, theory‐consistent bounds on demand and welfare predictions on counterfactual budge sets.

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Wöster, Christoph. "An efficient algorithm for pricing barrier options in arbitrage-free binomial models with calibrated drift terms." Quantitative Finance 10, no. 5 (May 2010): 555–64. http://dx.doi.org/10.1080/14697680902828456.

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Khan, Shakeeb, Fu Ouyang, and Elie Tamer. "Inference on semiparametric multinomial response models." Quantitative Economics 12, no. 3 (2021): 743–77. http://dx.doi.org/10.3982/qe1315.

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We explore inference on regression coefficients in semiparametric multinomial response models. We consider cross‐sectional, and both static and dynamic panel settings where we focus throughout on inference under sufficient conditions for point identification. The approach to identification uses a matching insight throughout all three models coupled with variation in regressors: with cross‐section data, we match across individuals while with panel data, we match within individuals over time. Across models, we relax the Indpendence of Irrelevant Alternatives (or IIA assumption, see McFadden (1974)) and allow for arbitrary correlation in the unobservables that determine utility of various alternatives. For the cross‐sectional model, estimation is based on a localized rank objective function, analogous to that used in Abrevaya, Hausman, and Khan (2010), and presents a generalization of existing approaches. In panel data settings, rates of convergence are shown to exhibit a curse of dimensionality in the number of alternatives. The results for the dynamic panel data model generalize the work of Honoré and Kyriazidou (2000) to cover the semiparametric multinomial case. A simulation study establishes adequate finite sample properties of our new procedures. We apply our estimators to a scanner panel data set.

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Pindyck, Robert S. "Climate Change Policy: What Do the Models Tell Us?" Journal of Economic Literature 51, no. 3 (September 1, 2013): 860–72. http://dx.doi.org/10.1257/jel.51.3.860.

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Very little. A plethora of integrated assessment models (IAMs) have been constructed and used to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies. These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g., the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models' descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading. (JEL C51, Q54, Q58)

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