...Asymmetric Shocks, Long-term Bonds and Sovereign Default1 Junjun Zhu, Shiyu Xie School of Economics, Fudan University January 2011 Abstract: We present a sovereign default model with asymmetric shocks and long-term bonds, and solve the model using discrete state dynamic programming. As result, our model matches the Argentinean economy over period 1993Q1-2001Q4 quite well. We show that our model can match high default frequency, high debt/output ratio and other cyclical features, such as countercyclical interest rate and trade balance in emerging countries. Moreover, with asymmetric shocks we are able to match high sovereign spread level and low spread volatility simultaneously in one model, which is till now not well solved. As another contribution of our paper, we propose a simulation-based approach to approximate transition function of output shocks between finite states, which is an indispensable step in discrete state dynamic programming. Comparing to Tauchen’s method, our approach is very flexible in transforming various econometric models to finite state transition function, so that our approach can be widely used in simulating different kinds of discrete state shocks. JEL Classification: E44, F32, F34 Keywords: Sovereign Default, Asymmetric Shocks, Transition Function, Long-term Bonds 1 Corresponding authors: Junjun Zhu, Ph.D candidate at School of Economics, Fudan University, No. 200 Guoquan Road, Shanghai 200433, China. Shiyu Xie, professor at School of Economics...
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...| An Introduction to Cribbing Isomophs, Gaussian Elimination and The Hidden Markov Model | | Abstract While looking into cryptography and the building blocks that make up ciphers and theory, a mix of time and effort has produced concrete methods of cryptanalysis to identify the temporal pattern recognitions and algorithms necessary to decrypt cipher-text back to its plaintext root. This paper will look at the process of cribbing isomorphs to reveal the plaintext message, Gaussian Elimination and the process of back substitution, and the Hidden Markov Model to view visible output to that which was once hidden. Table of Contents Introduction 2 Cribbing Isomorphs 3 The Hidden Markov Model 4 Gaussian Elimination 5 Conclusion 6 Introduction In any cryptanalysts toolbox, there are a number of methods at their dispense which can aid in the deciphering of crypto-text messages back into their native plaintext message. Since the dawn of man, ways have been invented to hide secret information in an attempt to keep secret an intent, hide a plan, cover up a bad deed or whisper softly over distances. Encryption has proven the means to get this data over a medium and ensure that the integrity of the message arrives intact. Many times this information is intercepted and then the deciphering process begins. By knowing a certain amount about a message, cryptanalysts are able to piece the remaining message together by using cribbing, algorithms and back substitution...
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...Introduction Background of the study It is a common issue to test whether the stock prices are efficient, in most of the researches. It is found that long term returns are more predictable than short term and thus mean reverting. Studies mainly focus on autocorrelation of returns in different time lengths. In finance theory it says when autocorrelation of stock prices is there, then prices are predictable. Therefore, it is evidence against the random walk hypothesis of stock prices. Objective of the study The objective of this research is to test the efficiency of stock prices in Sri Lanka studying autocorrelation of short and long term returns in the CSE. Significance of the study There was a previous research on the predictability of short term returns and mean reversion in long term return in Sri Lanka in two important ways. 1. Previous studies utilized only shorter time periods because lack of long time series, since Sri Lankan stock market commenced only in 1985 and some researchers only used limited data which is the shorter time series available. Whereas the present study uses all-time series of returns available as at the research date (18.5 years from 1985-2003). 2. All previous papers tested only the short term returns except one. But this study examines short term predictability as well as long term mean reversion. It is important to use a long time series when predicting the long term returns to obtain correct results. Therefore, this...
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...17 March 2015 In 2013, Michigan State University football team went a span of 194 minutes and 33 seconds without allowing a touchdown; Michigan State’s defense has allowed just 3.75 yards per play and 2.10 yards per rushing attempt, both of which rank No.1 in FBS; The Spartans lead the FBS in time of possession (34:56 per game).(SpartyOn.com) In Michigan, from 2009 to 2013 there were 88.9 percent of people age of 25 above have education of high school graduate or higher which is higher than United State average of 86.0 percent, and also have 25.9 percent people have Bachelor’s degree or higher. In addition, Michigan has an average salary of jobs of $58,000. (Census.gov) Where these numbers came from? It is Statistics. “People cannot make research without statistics and analysis.”(Zeleke) Statistics is important and critical, it can solve for society problem. Nowadays, we have a lot of technological advancement, mobile technology and data in our daily life. The world becomes more and more complex. We need people to be proficient to understand all information out there. How do we process? What is important? How do we analyze the information and make the right decision? Now, there are lots of problem that we are facing: human, race, climate change, economics hardships, and political instability etc. For solving these problems, we need statistics and modeling. Statistics become more and more important; it is not only for statistician but also for everyone. Statistics not only help...
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...504 IEEE TRANSACTIONS ON AUTOMATION SCIENCE AND ENGINEERING, VOL. 5, NO. 3, JULY 2008 Stochastic Modeling of an Automated Guided Vehicle System With One Vehicle and a Closed-Loop Path Aykut F. Kahraman, Abhijit Gosavi, Member, IEEE, and Karla J. Oty Abstract—The use of automated guided vehicles (AGVs) in material-handling processes of manufacturing facilities and warehouses is becoming increasingly common. A critical drawback of an AGV is its prohibitively high cost. Cost considerations dictate an economic design of AGV systems. This paper presents an analytical model that uses a Markov chain approximation approach to evaluate the performance of the system with respect to costs and the risk associated with it. This model also allows the analytic optimization of the capacity of an AGV in a closed-loop multimachine stochastic system. We present numerical results with the Markov chain model which indicate that our model produces results comparable to a simulation model, but does so in a fraction of the computational time needed by the latter. This advantage of the analytical model becomes more pronounced in the context of optimization of the AGV’s capacity which without an analytical approach would require numerous simulation runs at each point in the capacity space. Note to Practitioners—This paper presents a model for determining the optimal capacity of an automated guided vehicle (AGV) to be purchased by a manufacturer. This paper was motivated by work...
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...Econometrics of Random Walk Hypothesis ABSTRACT The random walk hypothesis is a key instrument used in the analysis of forecasting in the economic and financial market. It is used primarily in the forecasting of the prices of stocks. This is useful to determine and forecast the prices of stocks given previous stock prices. This paper discusses the basis of the hypothesis, the two types of random walk hypothesis, its framework, methodologies and the analysis of its repercussions. INTRODUCTION The random walk hypothesis states that stock price changes have the same distribution and are independent of one another, so the past movement or trend of a stock price or of the market as a whole cannot be used to predict its future price or any possible future trends. The concept originated in the late 1800s from Jules Regnault, a French broker, and Louis Bachelier, a French mathematician, whose Ph.D. dissertation titled "The Theory of Speculation". The same ideas were later developed and studied further by Paul Cootner, an MIT Sloan School of Management professor, in his 1964 book The Random Character of Stock Market Prices. The term was popularized by the 1973 book, A Random Walk Down Wall Street, by Burton Malkiel, a professor of economics at Princeton University, and was used earlier in Eugene Fama's 1965 article "Random Walks In Stock Market Prices”. The theory that stock prices move randomly was earlier proposed by Maurice Kendall in his 1953 paper, “The Analytics of Economic Time...
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...of modern financial theory. Fama (1970) gives detailed definition of this theory and states that efficient market is a market that stock prices quickly and fully reflect all available and newly released information, where majority of participants are rational in their decision making process and where an investor is not able to outperform the market through any analyses, because of actual price of stock shows its intrinsic value. Naturally such revolutionary hypothesis did not occur suddenly. In 1990 Louis Bachelier in his "Theory of Speculation" paragraph gave definition of informational efficiency of the market. This study was not being developed until 1953 when Maurice Kendall who postulated that stock prices movement follow the random walk theory. Further enhancement of these studies associated with the name of Eugene Fama who gave comprehensive resume of efficient market hypothesis, as well as empirical evidences to support it and defined three form of efficient market: weak, semi-strong and strong in 1970 (Dimson and Mussavian, 1998). Later several different researches have been carried out by financial academics which continuously underpinned efficient market hypothesis. Consequently this theory began widely use by investors for investment decision making process. However only after two decades this hypothesis began less dominance in the market. Several crashes, changing economical situations revealed salient controversial criticisms of this hypothesis. Instead of testing...
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...“When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.” ------------------------------------------------- This report will analysis the statement by Warren Buffett, and it considers the contrasting evidence on the validity of the observation on the Efficient Markets Hypothesis. The report briefly outlines the forms of the Efficient Market Hypothesis, the report also analysis’s the evidence both seminal and recent on the theory relating to the three forms of the hypothesis. It also examines the theoretical role and motivation of analysts in creating market efficiency; lastly it looks at alternative perspectives on the pricing of securities. Introduction In 1984 Warren Buffett penned an article titled “The Superinvestors of Graham-and-Doddsville”, based on a speech he had given on the occasion of the 50th anniversary of his mentor Ben Graham’s legendary textbook, Security Analysis. In it, Buffett rejected the then growing (and now entrenched) view in academia that markets are ''efficient'' because ''stock prices reflect everything that is known about a company’s prospects and about the state of the economy.'' Warren Buffett argued against EMH, saying the preponderance of value investors among the world's best money managers rebuts...
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...Efficient Market Theory: An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. * Market price is an unbiased estimate of the true value of the investment * All pertinent information are incorporated immediately * Key concepts: * Market price has not to be equal to the true value at every point in time * Equal chance that stocks are under or over valued * No group of investors should be able to consistently find under or over valued stocks * Self-correcting mechanism * Information and competition are the essential principles guiding market efficiency * Market participants behave rational - irrational optimists buy a stock, smart money sells, and when irrational pessimists sell a stock, smart money buys, thereby eliminating the effect of the irrational traders on market price. * Prices are not predictable Issues with EMT * For example, efficient markets theory may lead to drastically...
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...11/2/2011 Corporate Finance Efficient Market Hypothesis Reading: Chapter13, BMAM IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM 1 Relationship among Three Different Information Sets All information relevant to a stock Information set of publicly available information Information set of past prices 13-2 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM 1 11/2/2011 The Different Types of Market Efficiency • Weak Form – Security prices reflect all information found in past prices and volume. • Semi-Strong Form – Security prices information. reflect all publicly available • Strong Form – Security prices reflect all information—public and private. 13-3 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM Relationship among Three Different Information Sets Strong Form Efficiency Semi strong form efficiency Weak Form Efficiency 13-4 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM 2 11/2/2011 Weak Form Market Efficiency • Security prices reflect all information found in past prices and volume. • If the weak form of market efficiency holds, then technical analysis is of no value. 13-5 IIMB / PCN / PGP I / Corp Fin L01 CH 13 BMAM Why Technical Analysis Fails Stock Price Investor behavior tends to eliminate any profit opportunity associated with stock price patterns. Sell Sell Buy Buy If it were possible to make big money simply by finding “the pattern” in the stock price movements, everyone would do it and the profits would be...
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...though their views toward market efficiency seem mutually contradictory, their theories has been highly valued by the finance academia as well as industry. This paper compares and contrasts the work of both of them and discusses how their work influence my understanding of finance. Fama is known for his work in initiating and developing the “efficient market hypothesis (EMH).” In his paper, Fama defines “efficient market” as “a market in which prices always fully reflect available information” (Fama 1970). If prices did reflect all available information, trading rules and fundamental analysis would not help investors to constantly earn abnormal return. This proposition has been checked by others and himself in the following papers: "Random Walks in Stock Market Prices (Fama 1965)," and "Filter Rules and Stock Market Trading Profits" (Blume, Fama 1966). Stock prices react to new information so quickly that it is almost impossible to trade on that piece of new information and profit from it. Furthermore, investors cannot earn abnormal returns without taking more systematic risk. To address the different types of information that stock prices could reflect, Fama prosed three types of market efficiency: (1) strong-form, where prices reflect all private and public information; (2) semi-strong form, where prices reflect all public information; and (3) weak-form, where prices only reflect past public information (Fama 1970). Index funds, which did not even exist fouty years ago, are...
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...SESSION TOPIC: STOCK MARKET PRICE BEHAVIOR SESSION CHAIRMAN: BURTON G. MALKIEL EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* EUGENE F. FAMA** I. INTRODUCTION THE PRIMARY ROLE of the capital market is allocation of ownership of the economy's capital stock. In general terms, the ideal is a market in which prices provide accurate signals for resource allocation: that is, a market in which firms can make production-investment decisions, and investors can choose among the securities that represent ownership of firms' activities under the assumption that security prices at any time "fully reflect" all available information. A market in which prices always "fully reflect" available information is called "efficient." This paper reviews the theoretical and empirical literature on the efficient markets model. After a discussion of the theory, empirical work concerned with the adjustment of security prices to three relevant information subsets is considered. First, weak form tests, in which the information set is just historical prices, are discussed. Then semi-strong form tests, in which the concern is whether prices efficiently adjust to other information that is obviously publicly available (e.g., announcements of annual earnings, stock splits, etc.) are considered. Finally, strong form tests concerned with whether given investors or groups have monopolistic access to any information relevant for price formation are reviewed.' We shall conclude that...
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...Investment Analysis Table of Contents UNIT 1 2 DQ1 2 DQ2: Describe the relationship between risk and return 4 DQ 3How can we use the Modified Altman and Modified Chanos algorithms to detect inflection points in determining leverage shifts? 5 UNIT 2 7 DQ 1: Describe the concept behind an efficient capital market. 7 DQ 2: Do you believe we have efficient capital markets? 8 DQ 3: What are the four required financial statements under IFRS and GAAP? 8 DQ 4: How do some managers improperly manipulate revenue and earnings 9 References 11 UNIT 1 DQ1 The recent financial reporting failures that have come to the foreground are due to the following factors. The write-up discusses why such failures took place and also gives examples for the same. Inaccurate accounting Financial reporting failures begin with inaccurate reporting at the preparation level itself. Be it deliberate or unknowing, the firms’ failure to prepare financial statements accurately is putting stability and future of the financial world in jeopardy (Bhattacharya, 2006). Grant Thornton’s analysis of the financial statements of 49 law companies belonging to the UK market has revealed that 20 percent of these companies have such accounting policies that conflict with the treatment of figures in the profit and loss account and balance sheet, while a further 10% are unclear because of inadequate narratives, according to a new report released on 22 November 2010 (Grant Thornton...
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...EFFICIENT MARKET THEORY (EMT) EMT states that the share price fluctuations are random and do not follow any regular pattern. Technical Analysts see meaningful pattern in their charts. This raises the Question as to whether the intrinsic value of stocks has any meaning. Are they related to the security prices? MARKET EFFICIENCY: the expectations of the investors regarding the future cash flows are translated or reflected on the share prices. The accuracy and the Quickness in which the market translates the expectations into prices are termed as market efficiency. There are 2 types of market efficiencies Operational efficiency Informational efficiency Operational efficiency; At stock exchange operational efficiency is measured by factors like time taken to execute the order and the number of bad deliveries. Investors are concerned with the operational efficiency of the market. Informational efficiency; It is a measure of swiftness or the market’s reaction to new information.Nerw information in the form of economic reports, company analysis, political statements, and announcement of new industrial policy is received by the market frequently. How does the market react to it? Security prices adjust themselves very rapidly and accurately. They never take a long time to adjust to the new information. LIQUIDITY TRADERS; These traders’ investments and resale of shares depend on their individual fortunes. Liquidity traders may sell their shares to pay their bills. They do not investigate...
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...The Efficient Market versus The Inefficient Market Many professionals have spent an endless time researching about the efficiency of the market. 5 years ago, we experienced one of the worst financial disasters in history and a lot of questions have been asked about the degree of efficiency of the market. Being in a recession has never been more dangerous because of globalization; the whole world can be affected, just like what happened in the crash of 2008. It started in the United States and went viral throughout the world. We could believe that the financial meltdown of 2008 was caused by market inefficiency but a market that is efficient can also be mispriced in some cases. If we follow the hypothesis of the efficient market, the current prices of a security should mirror the information available. The efficient market hypothesis offers three different forms: the weak form, semi strong form and strong form. The weak form states that investors are not to make unusual profits relying on historical prices. The semi-strong form commands that it is not possible to make uncommon profits solely using publicly available information due to the quick adjustment of the market which will prevent those profits. Also, using technical analysis for the semi-strong form will be useless to generate unusual profits. The third one is the strong form. It dictates that it is rarely the case when prices of securities include both the public and private information. However this form is rather...
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