Genetic multi-model composite forecast for non-linear prediction of exchange rates

The existence of non-linear deterministic structures in the dynamics of exchange rates has already been amply demonstrated. In this paper, we attempt to exploit these non-linear structures employing forecasting techniques, such as Genetic Programming and Neural Networks, in the specific case of the Yen/US$ and Pound Sterling/US$ exchange rates. Forecasts obtained from genetic programming and neural networks are then genetically fused to verify whether synergy provides an improvement in the predictions. Our analysis considers both point predictions and the anticipating of either depreciations or appreciations.First version received: July 2003 / Final version received: June 2004We wish to thank Pacific Exchange Rate Service for providing us the data.     

Moral hazard and general equilibrium in large economies

Summary. The paper analyzes a two period general equilibrium model with individual risk, aggregate uncertainty and moral hazard. There is a large number of households, each facing two individual states of nature in the second period. These states differ solely in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period each household chooses a non-observable action. Higher levels of action give higher probability of the good state of nature to occur, but lower levels of utility. Households' utilities are assumed to be separable in action and the aggregate uncertainty is independent of the individual risk. Insurance is supplied by a collection of firms who behave strategically and maximize expected profits taking into account that each household's optimal choice of action is a function of the offered contract. The paper provides sufficient conditions for the existence of equilibrium and shows that the appropriate versions of both welfare theorems hold. Received: December 7, 1998; revised version: October 25, 1999     

Human Capital and Optimal Policy in a Lucas-Type Model

We present a design of fiscal policy capable of providing the required incentives to make a decentralized economy with externalities move along the optimal transitional path in a Lucas-type human capital model. Journal of Economic Literature Classification Numbers: O41, E62, J24.     

Default models based on scale mixtures of Marshall-Olkin copulas: properties and applications

We present a unification of the Archimedean and the Lévy-frailty copula model for portfolio default models. The new default model exhibits a copula known as scale mixture of Marshall-Olkin copulas and an investigation of the dependence structure reveals that desirable properties of both original models are combined. This allows for a wider range of dependence patterns, while the analytical tractability is retained. Furthermore, simultaneous defaults and default clustering are incorporated. In addition, a hierarchical extension is presented which allows for a heterogeneous dependence structure. Finally, the model is applied to the pricing of CDO contracts. For this purpose, an efficient Laplace transform inversion approach is developed. Supporting a separation of marginal default probabilities and dependence structure, the model can be calibrated to CDS contracts in a first step. In a second step, the calibration of several parametric families to CDO contracts demonstrates a good fitting quality, which further emphasizes the suitability of the approach.     

Comovement among returns of the private Chilean pension system

Abstract

The measurement of comovement among economic variables is key in several areas of economics and finance. This article examines the comovement among Pension Fund Administrators (AFPs) in the Chilean private pension system from 2005 to 2016. We use several statistical methods to assess the comovement among the returns during this period. We found evidence of strong comovement among the returns of all AFPs; the higher the percentage of risk rate of the investment instrument, the higher the comovement was. The introduction of a new AFP in 2010 did not change the comovement patterns. The comovement analysis study shows that the quality attributes of the products offered by the AFPs are homogeneous, supporting the idea that concentrated markets with homogeneous products could incentivize tacit collusive behavior, which could distort the functioning of the pension market, thereby affecting the aggregate well-being of workers.     

Detection of false investment strategies using unsupervised learning methods

In this paper we address the problem of selection bias under multiple testing in the context of investment strategies. We introduce an unsupervised learning algorithm that determines the number of effectively uncorrelated trials carried out in the context of a discovery. This estimate is critical for computing the familywise false positive probability, and for filtering out false investment strategies.     

Exchange rate bubbles: Fundamental value estimation and rational expectations test

We propose a model of periodically collapsing bubbles which extends the Van Norden (1996) model, and nests it, by considering a non-linear specification for the bubble size in the survival regime, and the endogenous determination of the level of the fundamental value of the stochastic process. They allow us to test for rationality in the formation of expectations, and remove the arbitrariness of exogenously setting the level of the fundamental value. This general model is applied to the exchange rate of the Brazilian real to the US dollar from March 1999 to February 2011. The futures market exchange rate is used as a proxy of its expected future value, and three different structural models are considered for the determination of the fundamental value. The first two imply that the exchange rate satisfies either purchasing power parity (PPP), or a modified version of it. The third structural model is a version of the monetary model of exchange rate determination, fitted to the period under consideration. We obtain the maximum likelihood estimate of the parameters of the models, explore the properties of the errors, test its restricted versions, and compare the three specifications for the fundamental. We find that the models we propose fit well the data, and are useful in the heuristic interpretation of the exchange rate movements of the period. Finally we select the structural models that display the best performance, according to several criteria.     

Forecasting the performance of hedge fund styles

This article predicts the relative performance of hedge fund investment styles using time-varying conditional stochastic dominance tests. These tests allow for the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns. During the recent financial turmoil, our tests predict a superior performance for the Global Macro investment style compared with the other strategies of ‘Directional Traders’. The Dedicated Short Bias investment style is stochastically dominated by the other directional styles. These results are confirmed by simple nonparametric tests constructed from realized excess returns. Further, by utilizing a cross-validation method for optimal bandwidth parameter selection, we discover the factors that have predictive power regarding the density of hedge fund returns. We observe that different factors have forecasting power for different regions of the returns distribution and, more importantly, that the Fung and Hsieh factors have power not only for describing the risk premium but also, if appropriately exploited, for density forecasting.     

Structural estimation of a principal-agent model: moral hazard in medical insurance

Despite the importance of principal-agent models in the development of modern economic theory, there are few estimations of these models. I recover the estimates of a principal-agent model and obtain an approximation to the optimal contract. The results show that out-of-pocket payments follow a concave profile with respect to costs of treatment. I estimate the welfare loss due to moral hazard, taking into account income effects. I also propose a new measure of moral hazard based on the conditional correlation between contractible and noncontractible variables.