Speculative Strategies Research Articles

Pairs selection and outranking: An application to the S&P 100 index

Pairs trading is a popular quantitative speculation strategy. This article proposes a general and flexible framework for pairs selection. The method uses multiple return forecasts based on bivariate information sets and multi-criteria decision techniques. Our approach can be seen as a sort of forecast combination but the output of the method is a ranking. It helps to detect potentially under- and overvalued stocks. A first application with S&P 100 index stocks provides promising results in terms of excess return and directional forecasting.

Are Mutual Fund Managers Investors or Speculators?

The quantification of speculative risk appears to be useful for measuring risk in diversified portfolio, such as mutual funds. Based on the measure of systematic skewness, I explore the alleged shift among mutual funds toward more highly aggressive investment policies and the apparent increase in the diversity of investment policies from fund to fund. My sample covers 485 randomly selected mutual funds listed on Datastream for the period from April, 1997 to July, 2002. The risk taking behavior by mutual fund managers are investigated by linking to different market conditions and managerial incentives based on fund flow-performance relationship. Fund managers with enhanced performance tend to decrease the speculative risk of fund portfolios while fund managers with deteriorative performance tend to increase the speculative risk of fund portfolios. However, implementing speculative investment strategies and hence increasing portfolio speculative risk may not come without cost. The evidence of this article has some important implications with respect tobehavioral finance.

A TLP approach for BGP based on local speculation

With the explosive growth of Internet, the low efficiency of BGP has seriously influenced its usability. In this work, a TLP (thread level parallelism) approach with local speculation is proposed to improve the BGP performance. The thread partition is locally performed on each separated sub-module at route processing, and the speculation strategy is implemented to guarantee the memory consistency and sequential commit. Experiments on Intel Quad-core server show that this approach reaches an average speedup of 1.46 under single peer, multi-peers and route flapping. It is also shown that the packet throughput can be improved greatly under multiple sessions by taking advantage of TLP.

Carry Trade: The Gains of Diversification

Market participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets. Perhaps the most widely used currency speculation strategy is the carry trade. In this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies. We show that these gains are large. Diversification boosts the typical Sharpe ratio by over 50%.

Hierarchical Structures and Competitive Strategies in Car Development: Inter-Organizational Relationships with Toyota's First-, Second- and Third-Tier Suppliers

Previous research on product architecture has focused on postponement and speculation strategies on behalf of car makers and their first-tier parts suppliers, in their efforts to differentiate products and reduce product development lead time. However, except for product architecture, criteria have not been established on the strategic applications for second- and third-tier parts suppliers. This paper addresses this omission by investigating the organizational relationships between Toyota's second- and third-tier parts suppliers, and clarifies how a choice may be made between postponement and speculation strategy. It became clear that upper layers in the division of roles in the hierarchic system of the Japanese automobile industry developed a mutual form of relationship that allowed adjustments, and applied a postponement strategy; but at lower levels, a more formal division of responsibility and speculative strategy were involved. Which type of strategy is taken by the parts suppliers depends on their level in the hierarchic division of work responsibilities.

Assessing the performance of a prediction error criterion model selection algorithm in the context of ARCH models

A number of ARCH models are considered in the framework of evaluating the performance of a method for model selection based on a standardized prediction error criterion (SPEC). According to this method, the ARCH model with the lowest sum of squared standardized forecasting errors is selected for predicting future volatility. A number of statistical criteria, that measure the distance between predicted and inter-day realized volatility, are used to examine the performance of a model to predict future volatility, for forecasting horizons ranging from one day to 100 days ahead. The results reveal that the SPEC model selection procedure has a satisfactory performance in picking that model that generates ‘better’ volatility predictions. A comparison of the SPEC algorithm with a set of other model evaluation criteria yields similar findings. It appears, therefore, that it can be regarded as a tool in guiding the choice of the appropriate model for predicting future volatility, with applications in evaluating portfolios, managing financial risk and creating speculative strategies with options.

Absolute alterity: E. Levinas and J. Derrida

The article deals with a notion of absolute alterity in E. Levinas and J. Derrida. It questions the origin of that notion by stressing its temporal aspect. The “phenomenon” of death as absolute alterity allows to find out here at work both phenomenological and speculative strategies. The article shows position of Levinas as the junction of these two strategies. It presents in detail speculative moment of Levinas thought, which usually slips researchers’ attention, discusses the “dialectic”, which allows to move from the absolute alterity of death to the absolute alterity of other person in ethical relation. Derrida reads Levinas’ claim for absolute alterity in horizon of finitude: every other (one) is every (bit) other. In response to uniqueness of the event deconstruction appears as interpretative, aporetical experience. That means that it must take place in the interval that separates calculation and incalculable, universality and singularity. So it is experience of the undecidable. The article investigates Derrida’s strategy of deconstructive reading and raises the question: does not the deconstruction itself take the place of undeconstructible alterity (absolute alterity)?

Why medical research needs a new specialty of ‘pure medical science'

Sciences tend to go through boom and bust phases. Following decades of rapid expansion, medical science is now due for a collapse in overall funding. Furthermore, there has been a decline in the rate of therapeutic innovation, with fewer significant breakthroughs and little progress in several major areas of medicine such as oncology, psychiatry and autoimmune disorders. Mainstream medical research has gradually evolved into a form similar to industrial research and development (R&D), aiming at steady, reliable, predictable progress by ringing minor variations on existing approaches. Where this risk-averse approach is failing, a more speculative strategy is indicated. A new research specialty of 'pure medical science' would aim to seek radical new theories, technologies and therapies, and subject these to professional evaluation to the point where they can be applied in practice by more mainstream 'applied' medical scientists. A specialty of 'pure medical science' might be launched by financial support from patrons who wish to be associated with an elite new medical research discipline.

Pairs Trading: Performance of a Relative-Value Arbitrage Rule

We test a Wall Street investment strategy, ‘‘pairs trading,’’ with daily data over 1962–2002. Stocks are matched into pairs with minimum distance between normalized historical prices. A simple trading rule yields average annualized excess returns of up to 11% for self-financing portfolios of pairs. The profits typically exceed conservative transaction-cost estimates. Bootstrap results suggest that the ‘‘pairs’’ effect differs from previously documented reversal profits. Robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes. We link the profitability to the presence of a common factor in the returns, different from conventional risk measures. Wall Street has long been interested in quantitative methods of speculation. One popular short-term speculation strategy is known as ‘‘pairs trading.’’ The strategy has at least a 20-year history on Wall Street and is among the proprietary ‘‘statistical arbitrage’’ tools currently used by hedge funds as well as investment banks. The concept of pairs trading is disarmingly simple. Find two stocks whose prices have moved together historically. When the spread between them widens, short the winner and buy the loser. If history repeats itself, prices will converge and the arbi

Speculative trading in mean reverting markets

Mean reversion is a feature largely recognized for the price processes of many financial securities and especially commodities. In the literature there are examples where some simple speculative strategies, before transaction costs, were devised to earn excess returns from such price processes. Actually, the gain opportunities of mean reversion must be corrected to account for transaction costs, which may represent a major issue. In this work we try to determine sufficient conditions for the parameters of a mean reverting price process as a function of transaction costs, to allow a speculative trader to have positive expectations when deciding to take a position. We estimate the mean reverting parameters for some commodities and correct them for transaction costs to assess whether the potential inefficiency is actually relevant for speculative purposes.

Estimation and arbitrage opportunities for exchange rate baskets

This paper analyses short-term portfolio investment opportunities in a capital market where a currency is defined as a currency basket. In line with the mean-variance hedging approach, a self-financed optimal investment strategy is determined which minimizes the expected quadratic cost function. The successful implementation of the speculative strategy requires a precise estimate of the basket weights, which are possibly non-constant over time. To this end, an adaptive non-parametric procedure is suggested which provides satisfactory results both on simulated and real data. The optimal investment strategy is applied to the case of the Thai Baht basket whereby the weights are computed by means of the adaptive estimator. A recursive estimator, a rolling estimator and the Kalman filter, are implemented and serve as benchmark models. Results are compared with the literature. The different estimators are evaluated with profit-based criteria and the performance of the adaptive estimator turns out to be the best one.

Troubled Savings and Loan Institutions: Turnaround Strategies Under Insolvency

Unexpected increases in interest rates during the early 1980s and decreases in asset quality in the late 1980s caused massive losses throughout the savings and loan industry. Insolvency was common. But because of bureaucratic forbearance, funding constraints, and federal deposit insurance, hundreds of insolvent thrifts continued to operate. This is because regulatory agencies were unwilling or unable to close thrift institutions immediately upon insolvency. Instead, they progressively reduced the thrift capital requirement and later refrained from enforcing that requirement in the hope that the industry would recover. Coupled with deposit insurance and the expanded investment and lending powers granted to the industry in the early 1980s, this regulatory forbearance gave thrift managers the opportunity to pursue strategies to turn around their firms, to regain profitability and to restore adequate capital levels. Did the thrift industry seize this opportunity? Did managers of successful thrifts adopt different strategies to turn around their firms than managers of their unsuccessful counterparts? Or did they select the same strategy and simply enjoy good fortune? Our results show that when the crisis surfaced in the early 1980s, recovering thrifts operated in a fashion similar to failing thrifts. However, in the mid-1980s, recovering firms pursued risk-minimizing strategies while non-recovering firms pursued riskier, and on average, higher-growth strategies. The asset growth of unsuccessful thrifts is consistent with a speculative growth strategy, while that of recovered thrifts is more consistent with the natural market growth associated with successful firms. Perhaps surprisingly, given media attention to fraud and managerial misconduct, we find no evidence of excessive perquisite consumption in unsuccessful thrifts. We find that only 24 percent of the 300 thrifts in our sample eventually did recover between the end of 1979 and the end of 1989, while 55 percent fail or merge. The others survive as independent institutions, but with less than the three percent capital requirement of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; that is, they not only failed to rebuild their capital to the previous five percent requirement, they did not even meet the much less stringent hurdle in place by the end of the decade. Even with continued regulatory forbearance, we find no evidence that their condition improved. These results have important implications for both thrift managers and supervisory agencies. Our results suggest that successfully turning around poorly capitalized thrifts during the 1980s was neither easy nor likely. Those managers that were successful tended to concentrate on more traditional thrift activities involving lower-risk assets and liabilities. Regulatory agencies and thrift supervisors charged with monitoring the industry cannot ignore the recovery rate for our sample thrifts of a mere 24 percent, and further, our evidence suggests that identifying firms which would eventually recover would at best have been very difficult. Although other studies have shown that it is relatively easy to distinguish risky thrifts from safe ones, pinpointing which of the insolvent institutions will ultimately recover may not be possible using only financial data.

Preferensi Investor terhadap Strategi Investasi di Pasar Modal

This research responses issues about securities investment in capital market impacted by the process of mental discounting and its various preferences among investor in making the accurate type strategy of securities investments.The investor had preference of utility on income subjective discounted interest rate in speculative, aggressive, core type investment strategy and foundation capital. Using domain on investment strategy, the researcher hypothesized that discounted interest rate of subjective preference to escort domain investment strategy had different level mean, variance, and model. Analyses were based on 303 investors in 4 clusters (speculative strategy, aggressive strategy, core strategy, and foundation capital strategy) of members of Masyarakat Investor Sekuritas Indonesia (MISI). The result shows that discounted interest rate between domain investment strategy has mean level and explained model differently, but has not different variance as told that subjective discounted interest rate preferences equal to the risk of investors preference. This indicates that maximum utility investor on income suggested to get optimal return with the same risk. Related to the impact of turbulence market factor on bearish condition, investors have no risk preference. This result also show speculative, aggressive strategy, core strategy model of domain investment, and foundation capital strategy are different among group.

Assessing the Performance of a Prediction Error Criterion Model Selection Algorithm

Autoregressive Conditional Heteroscedasticity (ARCH) models have successfully been applied in order to predict asset return volatility. Predicting volatility is of great importance in pricing financial derivatives, selecting portfolios, measuring and managing investment risk more accurately. In this paper, a number of ARCH models are examined in the framework of a method for model selection based on a prediction error criterion (PEC) and their ability to predict future volatility is examined. According to this method, the ARCH model with the lowest sum of squared standardized forecasting errors is selected for predicting future volatility. A number of evaluation criteria are used to examine the performance of a model to predict future volatility, for forecasting horizons ranging from one day to one hundred days ahead. The results show that the PEC model selection procedure has a satisfactory performance in selecting that model that generates “better” volatility predictions. It appears, therefore, that it can be regarded as a tool in guiding one’s choice of the appropriate model for predicting future volatility, with applications in evaluating portfolios, managing financial risk and creating speculative strategies with options.

Inside the Natchez Trace Collection: New Sources for Southern History

Inside the Natchez Trace Collection: New Sources for Southern History. Edited by Katherine J. Adams and Lewis L. Gould. (Baton Rouge: Louisiana State University Press, 1999. Pp. x, 207. Illustrations, appendix. $35.00.) Recently opened by the University of Texas at Austin, the Natchez Trace Collection represents a substantial storehouse of information on the Lower Mississippi Valley, one of the foremost slaveholding regions of the United States. This concise, ably-edited volume offers six views of topics that should invite the interests of students of southern from a wide range of perspectives. Whether or not the collection will help produce significant revisions of southern is unclear, but at the very least the contributors indicate ways that the NTC will enable scholars to create more nuanced portraits of the Natchez district. In his introduction, Lewis L. Gould sums up the volume's goal as a guided tour through the NTC's contents the context of existing scholarly research on southern history (5). Some readers might have preferred a more actively speculative strategy, which would have encouraged the contributors to use their discussions as a means of proffering new interpretations of the southern past. On the whole, however, the editors' choice seems a sound one. In any event the suggested alternative was probably not possible, as the NTC appears to contain mainly the kinds of documents that southern historians have traditionally mined and thus seems most appropriate for engaging in prevailing debates and interpretations. Students interested in the southern frontier, slavery in the Natchez district, the lives of women, and sectionalism should find the volume particularly useful. As John Guice's contribution Windows on the Old Southwest makes clear, the NTC holds a wealth of information on the region during its earliest stages of development. Provincial and Territorial Records illuminate aspects of the Natchez district's French and Spanish past as well as the significance of cattle ranching to the earliest white settlers. Unfortunately, few documents appear to touch on the powerful Indian presence in the region. This disappointing lacuna results primarily from the collection's neglect of the Natchez Trace itself. The current archivists are certainly not to blame for this circumstance, but they may be faulted for assigning a misleading name to the collection. Several of the contributors comment on the relatively poor sources for studying women. Yet as Katherine Adams deftly shows, analyses of women are quite possible. In particular, the NTC appears to shed much light on how women handled health care and the education of elite children. Although most of the documents pertain to elite women, Adams cites enough scattered information on slave women and white working women to spark the interest of concerned students. Not surprisingly, slavery draws the attention of all the contributors. Randolph Campbell's essay offers the most focused analysis of the NTC's information on the peculiar institution. …

Empirical performance of alternative pricing models of currency options

This article examines the out-of-sample pricing performance and biases of the Heston’s stochastic volatility and modified Black-Scholes option pricing models in valuing European currency call options written on British pound. The modified Black-Scholes model with daily-revised implied volatilities performs as well as the stochastic volatility model in the aggregate sample. Both models provide close and similar correspondence to actual prices for options trading near- or at-the-money. The prices generated from the stochastic volatility model are subject to fewer and weaker aggregate pricing biases than are the prices from the modified Black-Scholes model. Thus, the stochastic volatility model may provide improved estimates of the measures of option price sensitivities to key option parameters that may lead to more effective hedging and speculative strategies using currency options. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:265–291, 2000

Empirical performance of alternative pricing models of currency options

This article examines the out-of-sample pricing performance and biases of the Heston’s stochastic volatility and modified Black-Scholes option pricing models in valuing European currency call options written on British pound. The modified Black-Scholes model with daily-revised implied volatilities performs as well as the stochastic volatility model in the aggregate sample. Both models provide close and similar correspondence to actual prices for options trading near- or at-the-money. The prices generated from the stochastic volatility model are subject to fewer and weaker aggregate pricing biases than are the prices from the modified Black-Scholes model. Thus, the stochastic volatility model may provide improved estimates of the measures of option price sensitivities to key option parameters that may lead to more effective hedging and speculative strategies using currency options. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:265–291, 2000

Emergence of Money as a Medium of Exchange: An Experimental Study

This paper reports findings from an experiment that implements a search-theoretic model of money as a medium of exchange. The question examined is whether subjects learn to adopt the same commodities as media of exchange that the model predicts will be used in equilibrium. We report that subjects have a strong tendency to play “fundamental” rather than “speculative” strategies even in environments where speculative strategies yield higher payoffs. We examine some possible motivations for subjects' behavior and conclude that subjects are mainly motivated by past payoff experience as opposed to the marketability considerations that the theory emphasizes. (JEL D83, E40)

Turtles, Tails, and Stereos

S pread trailing of futures contracts is an essential futures market activity, providing an important component of market liquidity; particularly in the deferred contract months. Market participants have used simple types of spread trades since the earliest trailing in futures contracts. Modern futures traders employ a wide range of speculative spreading strategies, including some complicated and exotic trades that are derived from arbitrage fundamentals. Despite the practical relevance of spread trading, treatment of this subject in the academic literature is incomplete and, typically, imprecise. Numerous interesting and widely used trades, such as the crack spread and stereo trades, have received little or no direct attention. A primary objective of this article is to examine a class of spread trading strategies derived from

Parts, wholes, and part-whole relations: The prospects of mereotopology

We can see mereology as a theory of parthood and topology as a theory of wholeness. How can the two be combined to obtain a unified theory of parts and wholes'? This paper examines three main ways of answering this question. On the first account, mereology and topology form two independent (though mutually related) domains. The second account grants priority to topology and characterizes mereology derivatively, by defining parthood in terms of wholeness (more specifically: connectedness). The third approach reverses the order, exploiting the idea that wholeness (connectedness) can be explained in terms of parthood along with other predicates or relations. The analysis and comparison of these strategies is mostly formal (and within the confines of standard first-order theories), but their relevance to spatio-temporal reasoning and representation is emphasized. Some more speculative strategies and directions for further research, such as the development of a unified framework based on a single mereotopological primitive of connected parthood, are also briefly considered.