Here we list some of the more specialised or old papers that are available for download.

Directional entropy and tail uncertainty, with applications to financial hazard   Financial risk management metrics such as value at risk (VaR) can be illuminated by means of a regime-specific concept of directional entropy. This enables a change of measure via a rescaling function to an equivalent logistic distribution, one that has the same total and directional entropies at the chosen critical point. VaR rescaling adjusts the critical probability to capture the long tail entropy, and the scaling function can be used as a comparative metric for tail length. Directional entropy can be used to identify regions of maximal exposure to new information, which can actually increase entropy rather than collapse it.   Click Here To Download

Multi-scale variation, path risk and long term portfolio management   Strategic fund management and similar investment styles may be exposed over time to multi-scale variation that can create inconsistencies between portfolio methodology and welfare objectives. This paper utilises a more embracing temporal frame of reference that can reconcile macro-scale variation in investment value with the shorter run, according to welfare preferences as to path risk versus terminal value. Path exposures give rise to path risk, and this is operationally defined in terms of a spectral welfare function, encompassing Fourier and wavelet analysis within a common framework. The approach leads to dynamic analogues of mean-variance such as band pass portfolios that are more sensitive to variability at designated scales.   Click Here To Download

Monetary policy and the exchange rate: The Kiwi that had to fly   June 2007 saw the first serious attempt by the Reserve Bank of New Zealand to exercise its currency intervention powers, in an attempt to put a cap on the soaring NZ dollar. Sceptics pointed out that this was inconsistent with the comfort to the foreign exchange carry trade conveyed by signals that the official cash rate would remain high or even tightened further, and intervention attempts could even perversely drive the currency higher. The problem for monetary policy has been that in an incomplete debt market, the only real channel for the official cash rate to impact on fixed rate home mortgage rates is via the indirect feedback from offshore NZ interest rates. This means that the exchange rate becomes the vector. We argue on the basis of forward interest rates that the problem is fixing itself, and from here on will only be hindered by currency intervention or further tightening signals from the central bank.   Click Here To Download

Knowing A Bit but Not Too Much: Incomplete Directional Models and Their Use in Forecasting and Hedging   Directional calls are often more successful than precise value prediction, particularly at certain times, when underlying fundamentals suggest a breakout from the stable range. We adapt the categorical directional framework implicit in binomial or trinomial step processes to establish nonhomogeneous multinomial directional probabilities over coarser time intervals and show how such frameworks can be used for forecasting and hedging, including dynamic persistence. Problems of signal compression and outcome definition can be addressed using methods analogous to neuronal nets and fuzzy membership, revealing a connection of the latter with the EM algorithm. The methods are applied to derive forecasting and conditional hedge procedures for foreign exchange exposures.   Click Here To Download

Instrument insufficiency and economic stabilisation   Recently concerns have been raised in New Zealand about the effectiveness of monetary policy in controlling inflation while avoiding damage to the economy from high exchange rates. This review examines the basis for concern and identifies the problem as a failure in the primary instrument, namely the Reserve Bank’s official cash rate, to adequately impact further along the term structure curve, which has become the more sensitive area for aggregate demand. Direct control over expenditure is therefore weak, and too much leeway is left to the housing and other asset markets to sustain demand in the economy. Globalisation of credit availability and financial technology have helped to blunt the policy instrument in this respect, shifting the adjustment burden on to the exchange rate. Deft management of interest and currency expectations can help, but the problem may require closer coordination and cooperation between monetary and fiscal policy, restoring a stabilisation role for the latter.   Click Here To Download

Lifecycle derivatives, defined benefits and retirement income assurance   As the cost of funding babyboomer retirement under defined benefit schemes has become apparent, the resulting paradigm shift to defined contribution - but undefined rewards - has left pensioners exposed to performance, credit, and longevity risk, as life tables lengthen. Defined benefit schemes can be designed off the back of high grade debt issuance programmes by public long term asset vehicles, as an infrastructure-retirement double play. Derivatives can be used to enhance coupons and to correctly align risk preferences as between income while still alive and bequests. Variable lifetime reinvested coupon options and annuity swaps utilise market pricing to provide unambiguous pricing benchmarks and a necessary underpinning of lifecycle planning certainty. The result is a flexible mix of private and public provision of old age income assurance, which exploits the externalities of a well-designed system of public debt.   Click Here To Download

Which are the world’s wobblier currencies?   Measuring country exchange rates relative to a common reference basket results in a set of no-arbitrage prices, unlike trade-weighted indexes, the usual method of comparing country exchange rate histories. The reference basket is analogous to a portfolio, and its choice can be resolved by drawing on required economic interpretations or uses. We use currency reference rates to examine the historical variability of different currencies over designated cyclical bands. The temporal decompositions used are those provided by wavelet analysis, which is light on maintained assumptions about data generating processes. Some countries, notably Japan and New Zealand, exhibit a powerful but irregular medium term cycle, while others are much more stable. Implications are briefly examined for investment, hedging, monetary policy and common currency studies.   Click Here To Download

Bifurcations and bubbly outcomes: The local instability of financial markets   Concerns about ‘short termism’ associated with hedge funds, and other manifestations of diminishing risk aversion, have revived interest in speculative bubbles and related episodes of financial instability. Earlier models of rational bubbles fell short in explaining why bubbles appear and collapse; nor can their dynamics generate local dependences in volatility or the mean of returns. It is shown that social reflexivity of investor opinions in response to information flows is capable of creating equilibrium bifurcations in the mapping from signals to states, and hence bubbly outcomes. Even serially uncorrelated information results in episodic locally-trapped states, that exhibit serially dependent returns and path dependence. Structural modelling of social influence connects local stickiness propensities to parameters and states of investor unanimity and risk aversion. As to hedge funds, it is suggested that the real risk lies in convergent behaviour.   Click Here To Download

Utility spanning and the ordered mean difference envelope   Ths paper shows how the utility generators that are implicit in stochastic dominance theory can be used to calculate the efficient set of portolios. The latter can be computed by means of linear programming, and it is shown that the portfolio solution for any arbitrary investor utility function must lie within this set, which is inherently one dimensional in nature, though not linear or convex.   Click Here To Download

The agribusiness cycle and its wavelets   Cyclical exposures of farm profit to the economic environment are a fact of life for farmers. By utilising the farmer terms of trade as a net profit margin metric, we show how wavelet analysis can be used to decompose the cycle and trend, analyse causal influences, and detect structural breaks. With the NZ dairy industry as case study, the wavelet decomposition reveals that shorter cycles are almost wholly the result of commodity prices. Longer cycles are produced by the interaction of commodity prices with the exchange rate, but with a strong natural buffering element. The buffer was upset following the Asian crisis of 1997-8, but may have restored itself since. A favourable long-term trend has appeared from the mid nineties onwards. Implications for risk management are briefly examined.   Click Here To Download