R.J. Mahieu (Ronald)
http://repub.eur.nl/ppl/1509/
List of Publicationsenhttp://repub.eur.nl/logo.jpg
http://repub.eur.nl/
RePub, Erasmus University RepositoryElectricity Portfolio Management: Optimal Peak / Off-Peak Allocations
http://repub.eur.nl/pub/17982/
Thu, 01 Jan 2009 00:00:01 GMT<div>R. Huisman</div><div>R.J. Mahieu</div><div>F. Schlichter</div>
Electricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients. This paper proposes a mean-variance framework to address the concept of structuring the portfolio and focuses on how to optimally allocate positions in peak and off-peak forward contracts. It is shown that the optimal allocations are based on the difference in risk premiums per unit of day-ahead risk as a measure of relative costs of hedging risk in the day-ahead markets. The outcomes of the model are then applied to show (i) that it is typically not optimal to hedge a baseload consumption profile with a baseload forward contract and (ii) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.Irving Fisher and the UIP Puzzle: Meeting the Expectations a Century Later
http://repub.eur.nl/pub/10774/
Fri, 07 Dec 2007 00:00:01 GMT<div>R.A.J. Campbell-Pownall</div><div>C.G. Koedijk</div><div>J.R. Lothian</div><div>R.J. Mahieu</div>
We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago.Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations
http://repub.eur.nl/pub/10775/
Fri, 07 Dec 2007 00:00:01 GMT<div>R. Huisman</div><div>R.J. Mahieu</div><div>F. Schlichter</div>
Electricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients. This paper proposes a mean-variance framework to address the concept of structuring the portfolio and focuses on how to allocate optimal positions in peak and off-peak forward contracts. It is shown that the optimal allocations are based on the difference in risk premiums per unit of day-ahead risk as a measure of relative costs of hedging risk in the day-ahead markets. The outcomes of the model are then applied to show 1) whether it is optimal to purchase a baseload consumption profile with a baseload forward contract and 2) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.Hedging Exposure to Electricity Price Risk in a Value at Risk Framework
http://repub.eur.nl/pub/8995/
Wed, 21 Feb 2007 00:00:01 GMT<div>R. Huisman</div><div>R.J. Mahieu</div><div>F. Schlichter</div>
This paper deals with the question how an electricity end-consumer or distribution company should structure its portfolio with energy forward contracts. This paper introduces a one period framework to determine optimal positions in peak and off-peak contracts in order to purchase future consumption volume. In this framework, the end-consumer or distribution company is assumed to minimize expected costs of purchasing respecting an ex-ante risk limit defined in terms of Value at Risk. Based on prices from the German EEX market, it is shown that a risk-loving agent is able to obtain lower expected costs than for a risk-averse agent.Do Exchange Rates Move in Line With Uncovered Interest Parity?
http://repub.eur.nl/pub/8993/
Mon, 19 Feb 2007 00:00:01 GMT<div>R. Huisman</div><div>R.J. Mahieu</div><div>A. Mulder</div>
According to uncovered interest rate Parity (UIP), the expected relative change in an exchange rate is equal to the difference between interest rates between the two currencies. Empirically, UIP is frequently rejected. In this paper, we examine whether exchange rates have at least any tendency to move in the direction predicted by UIP and whether exchange rates tend to move more in line with UIP in periods with large interest rate differentials.Revisiting Uncovered Interest Rate Parity: Switching Between UIP and the Random Walk
http://repub.eur.nl/pub/8288/
Mon, 15 Jan 2007 00:00:01 GMT<div>R. Huisman</div><div>R.J. Mahieu</div>
In this paper, we examine in which periods uncovered interest rate parity was likely to hold. Empirical research has shown mixed evidence on UIP. The main finding is that it doesn’t hold, although some researchers were not able to reject UIP in periods with large interest differentials or high volatility. In this paper, we introduce a switching regime framework in which we assume that the exchange rate can switch between a UIP regime and a random walk regime. Our empirical results provide evidence that exchange rate movements were consistent with UIP over some periods, but not all. Consistent with the existing literature we also show that in periods with large interest differentials or increased exchange rate volatility, the exchange rate is more likely to follow UIP.Hourly Electricity Prices in Day-Ahead Markets
http://repub.eur.nl/pub/8289/
Mon, 15 Jan 2007 00:00:01 GMT<div>R. Huisman</div><div>C. Huurman</div><div>R.J. Mahieu</div>
This paper focuses on the characteristics of hourly electricity prices in day-ahead markets. In these markets, quotes for day-ahead delivery of electricity are submitted simultaneously for all hours in the next day. The same information set is used for quoting all hours of the day. The dynamics of hourly electricity prices does not behave as a time series process. Instead, these prices should be treated as a panel in which the prices of 24 cross-sectional hours vary from day to day. This paper introduces a panel model for hourly electricity prices in day-ahead markets and examines their characteristics. The results show that hourly electricity prices exhibit hourly specific mean-reversion and that they oscillate around an hourly specific mean price level. Furthermore, a block structured cross-sectional correlation pattern between the hours is apparent.Financial Integration Through Benchmarks: The European Banking Sector
http://repub.eur.nl/pub/1834/
Wed, 22 Dec 2004 00:00:01 GMT<div>G.A. Moerman</div><div>R.J. Mahieu</div><div>C.G. Koedijk</div>
European banking regulation has been harmonized to a high degree over the last few decades. Nevertheless, the European banking industry remains fragmented as shown by the relatively high market shares of banks in their home countries. In this paper we concentrate on the integration process of European bank share prices. We develop a parsimonious model that is able to detect different integration (correlation) regimes. The model is applied to a set of 41 European banks that have a continuous share price listing over the period January 1990 – March 2003. Our main finding is that the correlation between larger banks in Europe has increased substantially over this period, whereas the correlation between smaller banks has become lower. A reason for this result could be that investors perceive that the activities of bigger banks get more integrated. Another reason may be that as a result of institutional and other larger investors turning their investment strategies towards a European sector-based approach, investors are tracking indices of the European banking sector. These indices are typically constructed from the stock prices of the larger banks. This would create an incentive for large banks to become more integrated with other large banks.A Range-Based Multivariate Model for Exchange Rate Volatility
http://repub.eur.nl/pub/282/
Mon, 10 Mar 2003 00:00:01 GMT<div>B. Tims</div><div>R.J. Mahieu</div>
In this paper we present a parsimonious multivariate model for
exchange rate volatilities based on logarithmic high-low ranges of
daily exchange rates. The multivariate stochastic volatility model
divides the log range of each exchange rate into two independent
latent factors, which are interpreted as the underlying currency
specific components. Due to the normality of logarithmic volatilities
the model can be estimated conveniently with standard Kalman filter
techniques. Our results show that our model fits the exchange rate
data quite well. Exchange rate news seems to be very currency-specific
and allows us to identify which currency contributes most to both
exchange rate levels and exchange rate volatilities.International Portfolio Choice
http://repub.eur.nl/pub/276/
Tue, 04 Mar 2003 00:00:01 GMT<div>B. Tims</div><div>R.J. Mahieu</div>
In this paper we analyze the impact of the investment horizon on
international port-folio choice. We approach this issue by considering
whether or not an investor shouldadd investments from other countries
to an existing portfolio. The statistical teststhat we employ
(spanning tests) are based on whether or not the investment spacecan
significantly be expanded within a mean-variance framework. Our
results indi-cate that for a U.S. based investor with a mean-variance
utility function diversifyingtowards other countries and asset classes
depends on the investment horizon. This holds especially for
portfolios that originally consist of investments in bonds.Regime Jumps in Electricity Prices
http://repub.eur.nl/pub/111/
Wed, 15 Aug 2001 00:00:01 GMT<div>R. Huisman</div><div>R.J. Mahieu</div>
Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices.On the Variation of Hedging Decisions in Daily Currency Risk Management
http://repub.eur.nl/pub/6877/
Thu, 08 Feb 2001 00:00:01 GMT<div>C.S. Bos</div><div>R.J. Mahieu</div><div>H.K. van Dijk</div>
Internationally operating firrns naturally face the decision whether or not to hedge the currency risk implied by foreign investments. In a recent paper, Bos, Mahieu and van Dijk (2000) evaluate the returns from optimal and alternative currency hedging strategies, for a series of 7 models, using Bayesian inference and decision analysis. The models differ in the way time-varying means, variances or the unconditional error distributions are incorporated. In this extension, we compare the hedging decisions and financial returns and utilities as they result from the modelling assumptions and the attitudes towards risk.Daily Exchange Rate Behaviour and Hedging of Currency Risk
http://repub.eur.nl/pub/6878/
Thu, 08 Feb 2001 00:00:01 GMT<div>C.S. Bos</div><div>R.J. Mahieu</div><div>H.K. van Dijk</div>
We construct models which enable a decision-maker to analyze the implications of typical time series patterns of daily exchange rates for currency risk management. Our approach is Bayesian where extensive use is made of Markov chain Monte Carlo methods. The effects of several model characteristics (unit roots, GARCH, stochastic volatility, heavy tailed disturbance densities) are investigated in relation to the hedging strategies. Consequently, we can make a distinction between statistical relevance of model specifications, and the economic consequences from a risk management point of view. We compute payoffs and utilities from several alternative hedge strategies. The results indicate that modelling time varying features of exchange rate returns may lead to improved hedge behaviour within currency overlay management.On the variation of hedging decisions in daily currency risk management
http://repub.eur.nl/pub/1653/
Thu, 09 Nov 2000 00:00:01 GMT<div>C.S. Bos</div><div>R.J. Mahieu</div><div>H.K. van Dijk</div>
Internationally operating firms naturally face the decision whether or not to hedge the currency risk implied by foreign investments. In a recent paper, Bos, Mahieu and van Dijk evaluate the returns from optimal and alternative currency hedging strategies, for a series of 7 models, using Bayesian inference and decision analysis. The models differ in the way time-varying means, variances or the unconditional error distributions are incorporated. In this extension, we compare the hedging decisions
and financial returns and utilities as they result from the modelling assumptions and the attitudes towards risk.Daily exchange rate behaviour and hedging of currency risk
http://repub.eur.nl/pub/1657/
Wed, 30 Aug 2000 00:00:01 GMT<div>C.S. Bos</div><div>R.J. Mahieu</div><div>H.K. van Dijk</div>
We construct models which enable a decision-maker to analyze the implications of typical time series patterns of daily exchange rates for currency risk management. Our approach is Bayesian where extensive use is made of Markov chain Monte Carlo methods. The effects of several model characteristics (unit roots, GARCH, stochastic volatility, heavy tailed disturbance densities) are investigated in relation to the
hedging strategies. Consequently, we can make a distinction between statistical relevance of model specifications, and the economic consequences from a risk management point of view. We compute payoffs from several alternative hedge strategies. These payoffs indicate that
modelling time-varying features of exchange rate returns may lead to improved hedge behaviour within currency overlay management.Daily exchange rate behaviour and hedging of currency risk
http://repub.eur.nl/pub/11335/
Sat, 01 Jan 2000 00:00:01 GMT<div>C.S. Bos</div><div>R.J. Mahieu</div><div>H.K. van Dijk</div>
We construct models which enable a decision maker to analyse the implications of typical time series patterns of daily exchange rates for currency risk management. Our approach is Bayesian where extensive use is made of Markov chain Monte Carlo methods. The effects of several model characteristics (unit roots, GARCH, stochastic volatility, heavy-tailed disturbance densities) are investigated in relation to the hedging strategies. Consequently, we can make a distinction between statistical relevance of model specifications and the economic consequences from a risk management point of view. We compute payoffs and utilities from several alternative hedge strategies. The results indicate that modelling time-varying features of exchange rate returns may lead to improved hedge behaviour within currency overlay management.Daily exchange rate behaviour and hedging of currency risk
http://repub.eur.nl/pub/1605/
Wed, 13 Oct 1999 00:00:01 GMT<div>C.S. Bos</div><div>R.J. Mahieu</div><div>H.K. van Dijk</div>
Exchange rates typically exhibit time-varying patterns in both means and variances. The histograms of such series indicate heavy tails. In this paper we construct models which enable a decision-maker to analyze the implications of such time series patterns for currency risk management. Our approach is Bayesian where extensive use is made of Markov chain Monte Carlo methods. The effects of several model characteristics (unit roots, GARCH, stochastic volatility, heavy tailed disturbance densities) are investigated in relation to the hedging decision strategies. Consequently, we can make a distinction between statistical relevance of model specifications, and the economic consequences from a risk management point of view. The empirical results suggest that econometric modelling of heavy tails and time-varying means and variances pays off compared to a efficient markets model. The different ways to measure persistence and changing volatilities appear to strongly influence the hedging decision the investor faces.Price Discovery on Foreign Exchange Markets with Differentially Informed Traders
http://repub.eur.nl/pub/7724/
Mon, 24 May 1999 00:00:01 GMT<div>F.C.J.M. de Jong</div><div>R.J. Mahieu</div><div>P.C. Schotman</div><div>I.W. van Leeuwen</div>
This paper uses Reuters exchange rate data to investigate the contributions to the price discovery process by individual banks in the foreign exchange market. We propose multivariate time series models as well as models in tick time to study the dynamic relations between the quotes of individual banks. We investigate the hypothesis that German banks are price leaders in the deutschmark/dollar market. Our empirical results suggest an important but not exclusive role for German banks in the price discovery process. There is also a group of banks, German and non-German, that lags behind the market and does not contribute to the price discovery process. In contrast to Peiers~(1997) we do not find evidence for stronger price leadership of Deutsche bank on days with suspected Bundesbank interventions in the foreign exchange market.An empirical application of stochastic volatility models
http://repub.eur.nl/pub/16768/
Thu, 01 Jan 1998 00:00:01 GMT<div>R.J. Mahieu</div><div>P.C. Schotman</div>
This paper studies the empirical performance of stochastic volatility models for twenty years of weekly
exchange rate data for four major currencies. We concentrate on the effects of the distribution of the
exchange rate innovations for both parameter estimates and for estimates of the latent volatility series. The
density of the log of squared exchange rate innovations is modelled as a flexible mixture of normals. We use
three different estimation techniques: quasi-maximum likelihood, simulated EM, and a Bayesian procedure.
The estimated models are applied for pricing currency options. The major findings of the paper are that:
(1) explicitly incorporating fat-tailed innovations increases the estimates of the persistence of volatility
dynamics; (2) the estimation error of the volatility time series is very large; (3) this in turn causes standard
errors on calculated option prices to be so large that these prices are rarely significantly different from a
model with constant volatility.An empirical application of stochastic volatility models
http://repub.eur.nl/pub/17280/
Thu, 01 Jan 1998 00:00:01 GMT<div>R.J. Mahieu</div><div>P.C. Schotman</div>