Technological indicators of market shift

The past few years have seen many cases of displacement of domestic products by similar imported products, or by domestic products performing the same function but using a different technology. It would be desirable to forecast these technologically based market shifts before they have adverse effects on the industry whose products are being displaced. This paper describes research that shows that indicators of technological change (patents, papers, R&D expenditures) can provide from one to three years advanced warning of a market shift.     

Probabilistic technological forecasts using precursor events

A critical issue in avoiding technological surprise is to identify new technologies which present threats or opportunities at an early stage in their development. Currently, technological forecasters use the method of precursors to provide this early identification. However, the information provided by the method of precursors is purely qualitative. This paper describes the use of the method of maximum entropy for generating a probability distribution for the time lag between demonstration of a device and its market introduction. Examples from the aerospace and automotive industries are used to illustrate the technique.     

Policy issues raised by direct broadcast satellites

Direct Broadcast Satellites, which transmit television programs directly to the viewer's home, present several policy issues that will have to be resolved during the next few years. Some of these issues transcend DBS, hence they must be resolved in a larger framework. Those that exist essentially within the framework of DBS include issues at the program producer's end, issues at the viewer's end, and technology issues. These latter are particularly important because inappropriate or unwise policy choices made now may nullify the benefits promised by improved technology.     

Estimating stochastic volatility models using integrated nested Laplace approximations

Volatility in financial time series is mainly analysed through two classes of models; the generalized autoregressive conditional heteroscedasticity (GARCH) models and the stochastic volatility (SV) ones. GARCH models are straightforward to estimate using maximum-likelihood techniques, while SV models require more complex inferential and computational tools, such as Markov Chain Monte Carlo (MCMC). Hence, although provided with a series of theoretical advantages, SV models are in practice much less popular than GARCH ones. In this paper, we solve the problem of inference for some SV models by applying a new inferential tool, integrated nested Laplace approximations (INLAs). INLA substitutes MCMC simulations with accurate deterministic approximations, making a full Bayesian analysis of many kinds of SV models extremely fast and accurate. Our hope is that the use of INLA will help SV models to become more appealing to the financial industry, where, due to their complexity, they are rarely used in practice.     

Smiles all around: FX joint calibration in a multi-Heston model

We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model preserves the natural inversion and triangulation symmetries of FX spot rates and its functional form, irrespective of choice of the risk-free currency. That is, all currencies are treated in the same way.     

Stochastic Jacobian and Riccati ODE in affine term structure models

In affine term structure models (ATSM) the stochastic Jacobian under the forward measure plays a crucial role for pricing, as discussed in Elliott and van der Hoek (Finance Stoch 5:511–525, 2001). Their approach leads to a deterministic integro-differential equation which, apparently, has the advantage of by-passing the solution to the Riccati ODE obtained by the standard Feynman-Kac argument. In the generic multi-dimensional case, we find a procedure to reduce such integro-differential equation to a non linear matrix ODE. We prove that its solution does necessarily require the solution of the vector Riccati ODE. This result is obtained proving an extension of the celebrated Radon Lemma, which allows us to highlight a deep relation between the geometry of the Riccati flow and the stochastic calculus of variations for an ATSM. We are grateful to two anonymous referees for their careful reading of the paper.