Showing papers by "Neil Shephard published in 2010"

Realising the future: forecasting with high‐frequency‐based volatility (HEAVY) models

Abstract: This paper studies in some detail a class of high-frequency-based volatility (HEAVY) models These models are direct models of daily asset return volatility based on realised measures constructed from high-frequency data Our analysis identifies that the models have momentum and mean reversion effects, and that they adjust quickly to structural breaks in the level of the volatility process We study how to estimate the models and how they perform through the credit crunch, comparing their fit to more traditional GARCH models We analyse a model-based bootstrap which allows us to estimate the entire predictive distribution of returns We also provide an analysis of missing data in the context of these models Copyright © 2010 John Wiley & Sons, Ltd

Stochastic volatility models

Abstract: Stochastic volatility (SV) is the main concept used in the fields of financial economics and mathematical finance to deal with the endemic time-varying volatility and codependence found in financial markets. Such dependence has been known for a long time; early commentators include Mandelbrot (1963) and Officer (1973). It was also clear to the founding fathers of modern continuous time finance that homogeneity was an unrealistic if convenient simplification; for example, Black and Scholes (1972, p. 416) wrote, ‘…there is evidence of non-stationarity in the variance. More work must be done to predict variances using the information available.’ Heterogeneity has deep implications for the theory and practice of financial economics and econometrics. In particular, asset pricing theory is dominated by the idea that higher rewards may be expected when we face higher risks, but these risks change through time in complicated ways. Some of the changes in the level of risk can be modelled stochastically, where the level of volatility and degree of codependence between assets is allowed to change over time. Such models allow us to explain, for example, empirically observed departures from Black-Scholes-Merton prices for options and understand why we should expect to see occasional dramatic moves in financial markets.

Multivariate Realised Kernels: Consistent Positive Semi-Definite Estimators of the Covariation of Equity Prices with Noise and Non-Synchronous Trading

Abstract: We propose a multivariate realised kernel to estimate the ex-post covariation of log-prices. We show this new consistent estimator is guaranteed to be positive semi-definite and is robust to measurement noise of certain types and can also handle non-synchronous trading. It is the first estimator which has these three properties which are all essential for empirical work in this area. We derive the large sample asymptotics of this estimator and assess its accuracy using a Monte Carlo study. We implement the estimator on some US equity data, comparing our results to previous work which has used returns measured over 5 or 10 minutes intervals. We show the new estimator is substantially more precise.

Deferred fees for universities

Abstract: I will argue for a simpler, fairer, more fiscally responsible and flexible form of university funding and student support. This system is designed to encourage a diverse higher education sector where high quality provision can flourish. The main points of the new system are: 1. Make student financial support available to cover all tuition and a modest cost of living. 2. Allow graduates to repay according to earnings with protection for poorer graduates. 3. Call HEFCE teaching grants “scholarships” and make students aware of their value. 4. Cap the level of funded fees plus HEFCE grant at the current level. 5. Allow universities to charge deferred fees. a. When they are paid the money goes to the student’s university not to the state. These fees have no fiscal implications. b. Bring some of the cash flow from deferred fees forward by working with a bank. 6. In the long-run move to making the cost of living support simpler by a. Providing more realistic cost of living support for all students. b. Removing means-tested university bursaries for cost of living expenses. c. Removing means-tested grants to students provided by the state. This builds on England’s higher education structure. The changes are simple to implement. It would set up a stable funding structure for our universities & provide the financial support our students need.

Submission to the review on “Higher Education Funding and Student Finance”

Abstract:  The system allows access by UK based students to full-time undergraduate education in the UK irrespective of ability to pay, subject to getting a place at a university. This should be kept.  The economic basis of the current system: o Education creates positive externalities so education should be supported by the state; o Education creates private benefit so graduates should contribute towards the cost of their tuition; o Returns to education are highly uncertain so someone (e.g. the state) should provide insurance (income contingency) in case the graduate’s earnings turn out to be modest; makes sense. This should be kept.

Deferred fees for universities

Abstract: I will argue for a simpler, fairer, more fiscally responsible and flexible form of university funding and student support. This system is designed to encourage a diverse higher education sector where high quality provision can flourish. The main points of the new system are: 1. Make student financial support available to cover all tuition and a modest cost of living. 2. Allow graduates to repay according to earnings with protection for poorer graduates. 3. Call HEFCE teaching grants “scholarships” and make students aware of their value. 4. Cap the level of funded fees plus HEFCE grant at the current level. 5. Allow universities to charge deferred fees. a. When they are paid the money goes to the student’s university not to the state. These fees have no fiscal implications. b. Bring some of the cash flow from deferred fees forward by working with a bank. 6. In the long-run move to making the cost of living support simpler by a. Providing more realistic cost of living support for all students. b. Removing means-tested university bursaries for cost of living expenses. c. Removing means-tested grants to students provided by the state. This builds on England’s higher education structure. The changes are simple to implement. It would set up a stable funding structure for our universities & provide the financial support our students need.