In this research, we review the relevant literatures to discuss the predictability of foreign exchange rates. Besides, we collect literatures to examine the development of the fundamental models, market models, technical analysis and trading rules and compare and evaluate the precision of these models. Moreover, we make a case study of a global leading investment bank to discuss how to use these models in practice. The result shows that fundamental models can help to establish the long-term equilibrium but have some shortcomings and thus we could adopt market models to resolve the shortages and the technical analyses and rules to set the exact price levels for trading purposes.

Thesis (MSc (Mathematics))--Stellenbosch University, 2008. / In the Benchmark Approach to Finance, it has been shown that by taking the Growth Optimal Portfolio as numéraire, a candidate for a pricing derivatives formula under the real world probability can be given. This result allows us to price in an incomplete financial market model. The result comes from two different approaches. In the first approach we use the supermartingale property of portfolios in units of the benchmark portfolio which leads to the fact that an equivalent measure is not needed. In the second approach the numéraire property of the Growth Optimal Portfolio is used. The numéraire portfolio defines an equivalent martingale measure and by change of measure using the Radon-Nikodým derivative, a real world pricing formula is derived which is the same as the one given by the first approach stated above.

<p>In this dissertation, I investigated price dynamics in the hotel room-night market and attempted to explain pricing decisions from a market perspective. Since market dynamics of the hotel room-night market can be paralleled to those in the financial market, financial market models allowed for examination of various aspects of hotel room pricing decisions.</p><p>In the first study, advance-purchase discounts were estimated through application of an option pricing model considering property-specific attributes. Non-refundable advance-purchase discounts are a commonly used rate fence. One challenge to their implementation, however, is deciding upon the precise magnitude of the discount. Quan’s (2002) study on the price of room reservations is a good starting point, but it is a conceptual model that assumes away other property-specific factors. This study thus tested the idea that advance-purchase discounts are affected by various components, including the value of the right to cancel a reservation (e.g., cancelation option value) and the room- and property-specific factors in the hotel room-night market (e.g., uncertainty, reviews, and seasonality). The analysis supported this hypothesis and additionally revealed that advance-purchase discounts are smaller for rooms with high review ratings in a high-demand period. Interestingly, the divergence between advance-purchase discounts and cancelation option value components widened in a high-demand period, which implies a tendency by hotels to adjust their room rates rather than the amount of discount for customers who book their stay well in advance. Theoretically, this study thus contributes to finance literature by extending the application of the option pricing model to real options for non-financial assets. This study also contributes to the hospitality literature by demonstrating the effects of property-specific attributes on advance-purchase discount magnitude. The results also have implications to the hospitality industry by providing an analytical framework by which hoteliers can estimate property-specific advance-purchase discounts.</p><p>The second study concentrated on rate parity agreement’s effect on the hotel room-night market’s efficiency at reflecting product characteristics in room rates. This study examined the impact of rate parity agreement between hotels and online travel agencies by comparing hotel rates between Europe and the United States. This study found that room rates were less sensitive to property quality attributes under rate parity clauses. The reflection of property quality on room rates were less efficient when hotels have rate parity agreement with OTAs. Furthermore, the results supported the claim that rate parity exacerbates price increase in periods of high demand, which indicates possible collusion between suppliers (hotels) and distributors (OTAs). The findings provided theoretical implications by testing the market efficiency of the hotel room-night market and confirming the impact at the property level. This study also provided a perspective on pricing decision makers to understand how rate parity agreement influence their pricing decisions. Last, the findings provided support for recent policies in Europe that restrict rate parity agreements between hotels and OTAs.</p><p>The third study empirically examined hoteliers’ response to the demand by observing the price movement of two rates with different cancelation policies—free cancelation rates and non-refundable rates. By modifying Hasbrouck’s (1995) information share approach, this study examined the non-refundable rates’ contribution to the price discovery process. The perceived quality of accommodation by customers, one of the primary determinants of the price discovery process, was included in analysis. The results suggested that non-refundable rates were contribute more to the information variance than free cancelation rates did. The findings also suggested that consumers’ perceived quality and volatility influence non-refundable rates’ contribution to the price discovery process. The results also have practical implications for market participants, as they help to build an understanding of aggregated demand and its impact on pricing. Non-refundable rates are generally regarded as just one of many kinds of discounted rates, but the results of this study suggest that hoteliers should carefully consider the role that non-refundable rates play in their pricing strategy.<br></p>

As energias renováveis têm lugar de destaque entre as soluções de combate ao aquecimento global, mas seu potencial ainda é subaproveitado no Brasil. Este trabalho visa apresentar argumentos político-estratégicos, socioambientais e econômico-financeiros necessários para viabilizar o desenvolvimento da comercialização de novas fontes de energias renováveis e, consequentemente, o estabelecimento de um mercado nacional maduro para estas fontes. São apresentadas justificativas socioambientais e técnicas para ampliar a produção de energia elétrica a partir de novas fontes renováveis como eólica, biomassa, solar e pequenas centrais hidroelétricas. Foi abordado o importante papel da política tarifária e o atual modelo do setor elétrico, assim como o forte impacto dos encargos e tributos sobre o preço final da energia e as questões relacionadas à revisão tarifária e seu impacto em áreas rurais e urbanizadas. Foi apresentado um cenário de participação das novas fontes de energias renováveis na matriz elétrica brasileira indicando o forte potencial de expansão destas fontes, valorizando a descentralização e diversificação da matriz para promoção da equidade e justiça e desvinculação entre o crescimento econômico e a ampliação da geração de energia. Foram apresentados vários modelos de mercado e concluiu-se que o modelo da competição no varejo é a melhor opção para a viabilização de uma comercializadora de novas fontes de energias renováveis. Foram apresentados estudos de casos em diversos países da Europa, Ásia e Américas e a análise de seus pontos mais interessantes visando contribuir para o desenvolvimento de um marco regulatório específico para fomentar um mercado nacional de energias renováveis. Entre as políticas referidas estão o sistema de cotas; sistema de licitação; subsídios e principalmente a tarifa feed-in, que atende em melhores condições diretrizes relevantes como a redução dos impactos ambientais, o desenvolvimento tecnológico nacional, a estabilidade de mercado e a ampliação de fontes limpas na matriz elétrica. Por fim, foi feita uma análise econômica de distintas fontes renováveis em condições variadas de mercado como taxa de retorno, custo de transmissão, crédito de carbono e outros. Desta forma foi possível avaliar as melhores e piores condições de formação de preço final por tecnologia (eólica, biomassa e PCHs) para implementação de uma comercializadora de energia. Neste estudo, foi possível avaliar o impacto da tarifa de transmissão assim como a sensibilidade do preço final da energia em relação à eventual flutuação do câmbio, para energias com maior parte de componentes precificados em moeda estrangeira. O trabalho conclui que a viabilização de uma comercializadora de energia renovável no país depende fundamentalmente de um marco regulatório estável, uma política financeira e fiscal de longo prazo e um modelo de mercado aberto. / Renewable energy plays a key role as part of the solutions to the climate change crisis. However, the potential for new renewable energy is underdeveloped in Brazil. This dissertation presents the necessary arguments to promote the development of the commercialization of new renewable energy sources within the political-strategic, socio-environmental and Economic-financial aspects for the implementation of a mature national market. Environmental, social and technical justification is used to enhance the expansion of electric energy generation from renewable sources such as wind, biomass, solar and small hydropower. The important role of tariff policy, the current model of the energy sector and the impact of taxes and fees in both rural and urban areas was also addressed in the text. A scenario is presented indicating the potential share of renewable energies in the electric matrix of the country and its expansion potential. The scenario emphasizes the decentralization and diversification of the energy matrix as well as promotes equitable justice and decouples the economic growth from new energy generation. A wide number of electricity trading markets were discussed and the competitive retail one was identified as the most suitable for the commercialization of new renewable energy sources. The most interesting elements of a number of case studies in Europe, Asia and US were analyzed to contribute to the discussion of a regulatory framework to develop a renewable energy market in Brazil. Among them the quota system; the auction system; the subsidies and finally the feed-in system that better addresses the reduction of environmental impact, national technology development, market stability and the expansion of renewable sources in the electricity matrix. Finally, an economic analysis of different renewable technologies (wind, biomass, small hydro) was deployed varying the return of investment rate, the grid cost, the carbon credits and others. The economic simulation set a price range with the best and worst conditions per technology for consideration in the commercialization of renewable Energy. In this study it was possible to evaluate the impact of the grid fee or the exchange rate for technologies with many imported components. The work concludes that the feasibility of the commercialization of renewable energy in the country relies mainly on stable regulatory framework, a financial and fiscal long term policy and an open energy market model.

As energias renováveis têm lugar de destaque entre as soluções de combate ao aquecimento global, mas seu potencial ainda é subaproveitado no Brasil. Este trabalho visa apresentar argumentos político-estratégicos, socioambientais e econômico-financeiros necessários para viabilizar o desenvolvimento da comercialização de novas fontes de energias renováveis e, consequentemente, o estabelecimento de um mercado nacional maduro para estas fontes. São apresentadas justificativas socioambientais e técnicas para ampliar a produção de energia elétrica a partir de novas fontes renováveis como eólica, biomassa, solar e pequenas centrais hidroelétricas. Foi abordado o importante papel da política tarifária e o atual modelo do setor elétrico, assim como o forte impacto dos encargos e tributos sobre o preço final da energia e as questões relacionadas à revisão tarifária e seu impacto em áreas rurais e urbanizadas. Foi apresentado um cenário de participação das novas fontes de energias renováveis na matriz elétrica brasileira indicando o forte potencial de expansão destas fontes, valorizando a descentralização e diversificação da matriz para promoção da equidade e justiça e desvinculação entre o crescimento econômico e a ampliação da geração de energia. Foram apresentados vários modelos de mercado e concluiu-se que o modelo da competição no varejo é a melhor opção para a viabilização de uma comercializadora de novas fontes de energias renováveis. Foram apresentados estudos de casos em diversos países da Europa, Ásia e Américas e a análise de seus pontos mais interessantes visando contribuir para o desenvolvimento de um marco regulatório específico para fomentar um mercado nacional de energias renováveis. Entre as políticas referidas estão o sistema de cotas; sistema de licitação; subsídios e principalmente a tarifa feed-in, que atende em melhores condições diretrizes relevantes como a redução dos impactos ambientais, o desenvolvimento tecnológico nacional, a estabilidade de mercado e a ampliação de fontes limpas na matriz elétrica. Por fim, foi feita uma análise econômica de distintas fontes renováveis em condições variadas de mercado como taxa de retorno, custo de transmissão, crédito de carbono e outros. Desta forma foi possível avaliar as melhores e piores condições de formação de preço final por tecnologia (eólica, biomassa e PCHs) para implementação de uma comercializadora de energia. Neste estudo, foi possível avaliar o impacto da tarifa de transmissão assim como a sensibilidade do preço final da energia em relação à eventual flutuação do câmbio, para energias com maior parte de componentes precificados em moeda estrangeira. O trabalho conclui que a viabilização de uma comercializadora de energia renovável no país depende fundamentalmente de um marco regulatório estável, uma política financeira e fiscal de longo prazo e um modelo de mercado aberto. / Renewable energy plays a key role as part of the solutions to the climate change crisis. However, the potential for new renewable energy is underdeveloped in Brazil. This dissertation presents the necessary arguments to promote the development of the commercialization of new renewable energy sources within the political-strategic, socio-environmental and Economic-financial aspects for the implementation of a mature national market. Environmental, social and technical justification is used to enhance the expansion of electric energy generation from renewable sources such as wind, biomass, solar and small hydropower. The important role of tariff policy, the current model of the energy sector and the impact of taxes and fees in both rural and urban areas was also addressed in the text. A scenario is presented indicating the potential share of renewable energies in the electric matrix of the country and its expansion potential. The scenario emphasizes the decentralization and diversification of the energy matrix as well as promotes equitable justice and decouples the economic growth from new energy generation. A wide number of electricity trading markets were discussed and the competitive retail one was identified as the most suitable for the commercialization of new renewable energy sources. The most interesting elements of a number of case studies in Europe, Asia and US were analyzed to contribute to the discussion of a regulatory framework to develop a renewable energy market in Brazil. Among them the quota system; the auction system; the subsidies and finally the feed-in system that better addresses the reduction of environmental impact, national technology development, market stability and the expansion of renewable sources in the electricity matrix. Finally, an economic analysis of different renewable technologies (wind, biomass, small hydro) was deployed varying the return of investment rate, the grid cost, the carbon credits and others. The economic simulation set a price range with the best and worst conditions per technology for consideration in the commercialization of renewable Energy. In this study it was possible to evaluate the impact of the grid fee or the exchange rate for technologies with many imported components. The work concludes that the feasibility of the commercialization of renewable energy in the country relies mainly on stable regulatory framework, a financial and fiscal long term policy and an open energy market model.

[pt] O mercado brasileiro de energia elétrica ainda não encontrou um modelo de mercado e de formação de preço que garanta a expansão auto-sustentada da oferta. Investigando em detalhe o modelo atual de despacho da geração e formação do preço, demonstramos a sua pouca eficácia na atração de investimentos, e identificamos a causa dessa falha como sendo a miopia do modelo de despacho, uma vez os estados críticos do sistema só aprecem de forma significativa quando o sistema já estiver degradado. São estudados três modelos alternativos que modificam a função-objetivo ou a regra de formação do preço, ajustados de modo a viabilizar e tornar suficientemente atrativos os investimentos na expansão da oferta. Finalmente, estes modelos são então comparados entre si e com o modelo atual, quanto ao valor para o investidor e quanto ao custo para o sistema e para o consumidor. Um mercado é dito completo se permite aos agentes alocar livremente seus recursos e demandas quando estiverem disponíveis e/ou forem necessários e permite que os agentes condicionem estes recursos / demandas ao estado (preço) do mercado. Estas funcionalidades são implementadas através dos derivativos financeiros, negociados no mercado futuro. Neste trabalho fazemos uma análise conceitual do mercado futuro de energia elétrica, indicando a diferença em relação ao de outras commodities e apresentando um modelo da oferta e demanda por contratos futuros de energia elétrica. / [en] The Brazilian Market of Electrical Energy has not yet found a stable market and price model that ensues the feasibility and makes attractive a self-sustained investment for the expansion of electrical energy generation. Researching the current generation dispatch and spot price model, we show that it is ineffective to attract investments because the model is myopic, since the range of critical system states that is foreseen at the current state is not significant until the system is already too degraded. Stemming from this conclusion, we develop three alternative models, modifying the dispatch model objective and the price formation rule. These alternative models are tuned to make the investments in generation expansion feasible and attractive. The models are compared regarding their value to the investor and the cost to the system and to the consumer. A complete market allows the economic agents to freely allocate their resources and requirements whenever they are available and/or required. A complete market also allows conditional settlement, i.e., to condition the resource availability and/or requirement to a particular market state (price). These features are realized by financial derivatives, in the, so called, futures market. We present a conceptual analysis of the electrical energy s future market, pointing the differences to other commodities future markets that are due to economical unfeasibility of storing electricity. We also present an equilibrium model for the forward electrical energy contracts.

In this thesis, we study numerical analysis for random processes and fields. We investigate the behavior of the approximation accuracy for specific linear methods based on a finite number of observations. Furthermore, we propose techniques for optimizing performance of the methods for particular classes of random functions. The thesis consists of an introductory survey of the subject and related theory and four papers (A-D). In paper A, we study a Hermite spline approximation of quadratic mean continuous and differentiable random processes with an isolated point singularity. We consider a piecewise polynomial approximation combining two different Hermite interpolation splines for the interval adjacent to the singularity point and for the remaining part. For locally stationary random processes, sequences of sampling designs eliminating asymptotically the effect of the singularity are constructed. In Paper B, we focus on approximation of quadratic mean continuous real-valued random fields by a multivariate piecewise linear interpolator based on a finite number of observations placed on a hyperrectangular grid. We extend the concept of local stationarity to random fields and for the fields from this class, we provide an exact asymptotics for the approximation accuracy. Some asymptotic optimization results are also provided. In Paper C, we investigate numerical approximation of integrals (quadrature) of random functions over the unit hypercube. We study the asymptotics of a stratified Monte Carlo quadrature based on a finite number of randomly chosen observations in strata generated by a hyperrectangular grid. For the locally stationary random fields (introduced in Paper B), we derive exact asymptotic results together with some optimization methods. Moreover, for a certain class of random functions with an isolated singularity, we construct a sequence of designs eliminating the effect of the singularity. In Paper D, we consider a Monte Carlo pricing method for arithmetic Asian options. An estimator is constructed using a piecewise constant approximation of an underlying asset price process. For a wide class of Lévy market models, we provide upper bounds for the discretization error and the variance of the estimator. We construct an algorithm for accurate simulations with controlled discretization and Monte Carlo errors, andobtain the estimates of the option price with a predetermined accuracy at a given confidence level. Additionally, for the Black-Scholes model, we optimize the performance of the estimator by using a suitable variance reduction technique.

The common theme throughout the thesis is to explore the possibility of using a single framework, namely the systems theory framework, in modeling a few stylized features of a financial market. A systems theoretic model is developed, in this thesis in Chapter 3, for confidence bias of an individual. The effect of this bias on his investment decision is brought out explicitly. The phenomenon of excessive trading, arising due to overconfidence and optimism, has been explained. The concept of virtual capital, incorporating the ideas from prospect theory, is introduced. We have proposed a dynamical system framework to model limits to arbitrage and the herding behavior in financial markets in Chapter 4. The market evolves due to the participation of traders. It is instructive to look at the market as a system evolving from a set of initial conditions during every time interval. In the proposed model, herding is defined as a specific relation between the system responses. The proposed herding measure quantifies how far the individual is from clustering with others. It is also shown how this interpretation helps us to understand the effects of herding. There exists a risk when the market price variation, due to herding, is thought of as entirely due to the portfolio fundamentals. The generic dynamical system model that captures some aspects of the limits of arbitrage is also proposed wherein fundamental risk, noise trader risk, implementation risk, and model risk can be incorporated. The proposed model offers a single framework to study the Marginally Efficient Market and Synchronization Risk models. In Chapter 5, we have proposed a switching dynamical system with minority game rules incorporated within the framework. We have explored the possibility of developing a market model, in Chapter 6, in the same framework that has been used to develop models for arbitrage and herding. We have explored, in this thesis, the possibility of using a single framework to model stylized features of stock market. It will be a long way before a single model can capture all complex characteristic features of a stock market. We have attempted, in this thesis, to capture a few stylized features in a single framework, if not in a single model. Different models proposed for individual confidence bias, limits to arbitrage, herding, and switching model for incorporating minority games are all set up in system dynamics framework. This leads to a stage where one can explore incorporating other features, not addressed in this thesis, in system dynamics framework. If each feature is captured using a different framework like confidence bias as stochastic system, herding as pattern cluster, limits to arbitrage as rule-based agents, etc., it would be difficult to integrate them into a single framework. But, in the present work, we have captured the chosen stylized features using system dynamics framework though individual models differ from each other substantially. The challenges are many in creating a single framework. The vision of such framework may involve different components such as modeling decision making, considering risk profiles, devising investment strategies, etc. Stylized features would come as emergent properties of complex interactions among the components of the system. Emergence refers to the way in which multiplicity of simple interactions lead to complex behavior. Emergence of such features may include different time scales of causal relationships among components. System may have thresholds, determined by diversity of traders and nature of interactions, which is vital for features to become emergent. This can be seen in practice. Stock market regulates the relative prices of companies across the world. There is no single central agency to control the workings of the market. Traders have knowledge of only few companies within their portfolio, and to follow transaction rules. Trends and patterns are still emerging which are studied by technical analysts. Emergent properties are mostly signature of self-organizing complex system. Self-organization in complex system relies on four properties which are fundamental in system dynamics framework: positive feedback, negative feedback, multiple interactions, and balance among strategies. A complex adaptive stock market system which is self-organizing and exhibit stylized features as emergent property is a distant goal of system theorists around the world. The challenge does not end there. We have attempted to model and study the stylized features of a stock market in systems theory framework. The focus of our approach is to use the dynamical system modeling to study the features. We have not considered the investment aspects in a financial market. The investment models are very important in real life for individuals and policy-makers. Future extension of the ideas explored in this thesis could be along the lines of creating investment models for individuals and policy-makers. Creating such models using complex adaptive stock market system goes a long way in understanding a phenomenon that had started by Dutch East India Company issuing shares on Amsterdam Stock Exchange way back in 1602.

Le but de cette thèse CIFRE est de construire un portefeuille de stratégies de trading algorithmique intraday. Au lieu de considérer les prix comme une fonction du temps et d'un aléa généralement modélisé par un mouvement brownien, notre approche consiste à identifier les principaux signaux auxquels sont sensibles les donneurs d'ordres dans leurs prises de décision puis alors de proposer un modèle de prix afin de construire des stratégies dynamiques d'allocation de portefeuille. Dans une seconde partie plus académique, nous présentons des travaux de pricing d'options européennes et asiatiques. / The aim of this CIFRE thesis is to build a portfolio of intraday algorithmic trading strategies. Instead of considering stock prices as a function of time and a brownian motion, our approach is to identify the main signals affecting market participants when they operate on the market so we can set up a prices model and then build dynamical strategies for portfolio allocation. In a second part, we introduce several works dealing with asian and european option pricing.