## Tesi etd-03242009-095849 |

Thesis type

Tesi di dottorato di ricerca

Author

PIRINO, DAVIDE ERMINIO

URN

etd-03242009-095849

Title

Theoretical and Empirical Essays on the Dynamics of Financial and Energy Markets

Settore scientifico disciplinare

SECS-S/06

Corso di studi

FISICA

Commissione

**Relatore**Prof. Renò, Roberto

Parole chiave

- thermodynamic equilibrium
- substitutability
- microeconomy
- jump
- HAR model
- Economic equilibrium
- detrended fluctuation analysis
- bipower variation
- volatility forecasting
- volatility estimator
- theshold

Data inizio appello

23/03/2009;

Consultabilità

completa

Riassunto analitico

This thesis is inspired by two main lines of research. Topics are analyzed in Chapters 1, 3, 4, 5 and 6.<br>Chapter 2 is devoted to help the reader unfamiliar with the concepts of measure theory and stochastic<br>processes.<br>The first line of research is dedicated to highlight a drawback of the standard economic equilibrium<br>model. We start from a question mainly raised by the ecological problem: is the economic equilibrium<br>consistent with the physical world? The answer seems to be negative. Economic equilibrium theory estab-<br>lishes the optimal level of production and consumption of goods. Consumption is, in fact, a social issue.<br>It depends on what consumers prefer for their own utility. For this reason consumption is not directly<br>related to the laws of physics. However production is unavoidably linked with a physical process: the ther-<br>modynamic transformation of basic commodities in elaborated one, useful for consumption. Despite this<br>fact most part of economic models, in the mainstream literature, completely neglect the thermodynamic<br>cycles hidden in every production process.<br>In the last two decades the ecological problem has gained attention over the scientific community,<br>focusing on the role of thermodynamic efficiency in the conversion of energy into work as a factor of<br>economic growth. In Chapter 1 we propose an analitycal approach to economic equilibrium which takes<br>into account for thermodynamic efficiency. Our idea is tho show that if irreversibility is present the classical<br>economic equilibrium is changed, resulting in a more parsimonious use of energy. Standard economic<br>equilibrium implies that the equilibrium itself remains unchanged if the numeraire adopted to price good<br>is changed, i.e. all numeraires are equivalent. This is a strong and quite controversial result: it is intuitive<br>that, being the conversion of energy into work intrinsically irreversible, energy is a special commodity and<br>it is not equivalent to the other ones. Pricing in terms of energy should not be equivalent to pricing in<br>terms of other goods, which in fact are obtained by energy itself.<br>Moreover the proposed ”thermodynamic-consistent” economy turns back into the classical one if the<br>production process is reversible. In this sense economic theory implicitly assumes that all production<br>processes are reversible.<br>This assumption conflicts with any real world production process.<br>The second line of research is independent from the first one and it is mainly devoted to the analysis of<br>discontinuities of assets quoted in financial markets. Several drastic events are known to have influenced<br>and changed the status of the financial markets. In such a situation the uncertainty hidden in financial<br>assets increased rapidly getting the markets into a very turbulent state. Examples of such events are the<br>1929 crash of Wall Street, Black Monday crisis of 1987 and the 9/11 terrorist attack. In fact these are<br>1<br>2<br>rare events of very high intensity. Many discontinuities of smaller amplitude affect the behavior of assets:<br>on the average we can identify, visually, 5−10 of such abrupt variations per year. Such kind of rapid and<br>intense variations are usually referred as jumps. In this context we expect that, after a jump has occurred,<br>the market switches in a new status characterized by an high level of volatility. As a consequence jumps<br>are expected to have a predictive power on the future behaviour of assets. Despite this is a very intuitive<br>fact it has not yet proved in the financial literature. A volatility forecasting model requires the definition<br>of a volatility proxy. The idea is that proxies adopted in the literature for forecasting purposes are, in fact,<br>contaminated by the presence of jumps in finite sample. In this context the forecasting power of jumps on<br>future volatility cannot be revealed.<br>In order to highlight such a feature it is needed a precise estimate of the jump component. In this<br>spirit we propose in Chapter 3 a powerful jump separation technique and we test its performances on<br>eight markets of electricity. The separation technique we adopt is taken from very recents results of<br>the financial literature and only requires the introduction of a threshold. In Chapter 4 we construct<br>precise volatility estimators using the threshold separation technique. This approach allows for a volatility<br>estimation unaffected by jumps. Moreover in Chapter 5 we show that a jump purified estimate of volatility<br>allow for a better investigation of its memory properties. Finally in Chapter 6 we construct a volatility<br>forecasting model based on the proposed estimators. Being based on an accurate separation of continuous<br>and discontinuous component of volatility, the model reveals the forecasting power of jumps on future<br>volatility. Moreover we find that the forecasting power of jumps extend to at least one month. A dazzling<br>example of the turbulence triggered by discontinuous variations is the recent crisis of markets. In September<br>2008 a global big crash has occurred in most part of stock exchanges. Since ever markets show an high<br>level of volatility, characterized by large returns of both negative and postivie intensity. In this sense our<br>results are very topical and constitute a basis for further investigations.

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