Gautam Vora

Investment decisions using genetic algorithms

We examine the performance of genetic algorithms as a method for deciding on a strategy to invest in different financial instruments. We discuss the literature, pointing out the different methods for making investment decisions. We then describe genetic algorithms, linking them to the procedure used in this study. We then report on the results obtained in our experiments.

Data transformation methods for genetic-algorithm-based investment decisions

In an earlier work, we examined the performance of genetic algorithms as a method for determining a strategy to invest in different financial instruments every month (S.K. Kassicieh et al., 1997). The inputs in the earlier work were differenced time series of 10 economic indicators where the genetic algorithm used the best three of these series to make the timing (or equivalently switching) decision. We use the same genetic algorithm with different data transformation methods applied to economic data series. These methods are the singular value decomposition (SVD) and principal component artificial neural network (PCANN) with 3, 4, 5 and 10 nodes. We report the result of a large number of runs to determine which of these methods works best. We find that the non standardized SVD of economic data yields the highest terminal wealth for the time period examined. The terminal accumulation is 78.75% of the dollar accumulation given by a perfect timing strategy.

Implementing No-Arbitrage Term Structure of Interest Rate Models in Discrete Time When Interest Rates Are Normally Distributed

The article develops a method for implementing nonarbitrage term structure of interest rate models for the single-factor model under the Heath-Jarrow-Morton (HJM) framework of the evolution of forward interest rates. The HJM framework is universal in the sense that it is based on the no-arbitrage condition, and it can accommodate nearly all existing models if interest rates - spot rate and forward rates - distributed normally. The implementation requires the calculation of drift adjustment terms (DATs) that are the functions of the volatilitys of forward rates. The method is equally effective with volatility functions that are integrable and those that are not. It is easy to understand, simple enough to implement for even difficult volatility functions, generalizable, and able to accommodate Monte Carlo simulations of interest rate modeling.

An Analytical Implementation of the Hull and White Model

One of the most parsimonious models of interest rate behavior is the “extended Vasicek” model of Hull and White. It has only one stochastic factor, but has the flexibility to match the initial term structure in the market, making it arbitrage-free. To build the market term structure into a trinomial valuation lattice, Hull and Whites implementation of the model involves a search process at each date plus forward induction. In this article, Grant and Vora show how this process may be streamlined considerably by using an analytic solution rather than a search at each date.

Global trade in creative services: an empirical exploration

ABSTRACT While global trade continues to rise steadily, the role of creative goods and services has been increasingly recognised for their contribution to economic development and growth. Export markets are an important component of creative goods and services. We assess the stability of earnings from exports of creative services exports. Creative services reflect the fundamental aspects of an economy, not only for the traditional factors of production but also for intangibles such as human capital, animated creative and innovative spirit of citizens and the infrastructure items of education system, development of information and communications technology (ICT), intellectual property regime of patents and copyrights, tourism and hospitality services and affordability of non-traditional tools of creativity. We use various samples of countries to encompass factor-driven, efficiency-driven and knowledge-driven economies. These samples are used to assess the performance of exports of creative services over the period 2003–2012. The results indicate that knowledge-driven economies are in the best position to gain handsomely from export of creative services. The economies at different stages of development need different imaginative policies for both traditional development and creative industries development. The paper discusses implications for decision-makers, trade development policies, the states role in fostering the development of creative industries and trade in creative services, and the public--private partnerships. An inescapable conclusion is that governmental support (direct financial, various forms of subsidies, facilities building, various regulatory regimes, etc.) is as indispensable as it was for industrial, agricultural or ICT sectors of the economy.

The Hull and White Model of the Short Rate: An Alternative Analytical Representation

Hull and White extend Ho and Lees no-arbitrage model of the short interest rate to include mean reversion. This addition eliminates the problem of negative interest rates and has found wide application. To implement their model, Hull and White employ a sequential search process to identify the mean interest rate in a trinomial lattice at each date. In this paper we extend Hull and Whites work by developing an analytical solution for the mean interest rate at each date. This solution applies equally well to trinomial lattices, interest rate trees, and Monte Carlo simulation. We illustrate the analytical result by applying it to an example originally used by Hull and White and then for valuing an option on a bond.

An examination of regulatory regime and public utility underwriting costs from an agency perspective

Abstract We examine from an agency-theoretic perspective the flotation costs incurred by public utilities, contending that the conflicts of interests among managers, owners, utility commissions, and consumers would be manifested in a negative relationship between the regulatory climate and flotation costs. Several hypotheses are tested using a sample of 538 seasoned equity issues of public utilities during the period 1973 through 1980. Contrary to our expectations, however, we find that the stringency (strictness) of regulatory climate is positively related to flotation costs. We offer some plausible explanations for the counter-intuitive results.

Analytical implementation of the Ho and Lee model for the short interest rate

Abstract Ho and Lee introduced the first no-arbitrage model of the evolution of the short interest rate. When expositing the Ho and Lee model, other authors used the method of numerical solutions and forward induction, an approach pioneered by Black, Derman, and Toy for their own model much later. This standard method of implementation is relatively complex and time consuming when applied to scenarios that enable the use of an interest-rate lattice. Under many assumptions, however, the Ho and Lee model will generate an interest-rate tree. Under these circumstances, implementation via numerical methods and forward induction appears to be impractical, if not impossible. In this paper, we show how to implement the model analytically. We demonstrate that it is relatively straightforward to identify at the initial date analytical expressions for all interest rates at all dates. Once these expressions are evaluated, the calculations to obtain interest rates are arithmetic operations. Our recommended method of implementation applies equally effortlessly to interest-rate trees and Monte Carlo simulation.

A two-stage approach to multi-period allocation of savings among investment plans

This paper presents a two-stage multi-period decision model for allocation of the individuals savings into several investment plans. Although the U.S. economy is used as the background, the modelling methods are general enough to accommodate any tax law. The first stage of the model uses an asset-allocation method based on the single-index model. Because this method is static and does not provide for tax considerations and other constraints, it alone is not enough. The output of this optimal selection is used as exogenous parameters and controls for the second stage of the model which is an integer program. The IP includes fixed charges, statutory and budgetary constraints, a discount rate, and the risk level. We provide an example of this approach to illustrate how an individual can achieve his goals of terminal accumulations while maintaining the risk level, measured by the aggregate beta, he prefers. A linear programming relaxation of the IP model is utilized for sensitivity analysis to examine whether future adjustments in investment strategies are required. The model remains tractable enough for implementation by individuals who may not be experts in mathematical programming and financial planning.

An Exploration of an Individual's Decision-Making Regarding Tax-Deferred Investment Plans

Several decision making models are presented in this article for allocating an individuals savings in tax-deferred opportunities. Because the models are general, they can examine any number of tax-deferred opportunities. The resource allocation problem is formulated as a linear program. Historical or forecast values of costs and returns are used as exogenous parameters of the linear program. The model is simulated under different scenarios to demonstrate that the linear programming approach can be fruitful, simple, and insightful in bridging the gap between theoretical findings and actual investment in various tax-deferred opportunities. The Internal Revenue Code of 1954, as amended, allows certain groups of individuals the opportunity to defer tax liability on contributions to individual retirement plans. Interest income on these plans is also tax-deferred. While statutory limitations on maximum contributions must be satisfied, the result is not only an attractive device for supplemental retirement income but also a potentially important investment vehicle in an individuals investment