Current and most Recent Projects funded by the Anniversary Fund of the Austrian Central Bank (OeNB)


Dynamic Investment Models with discontinuous Payoffs applied to Research and Development

Project Lead: Martin Meier
Team: Leopold Sögner
Duration: March 2018 to February 2021
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Funds - Project Number 17656 

Publications and presentations:

 

``Optimal High-Risk Investment'', 7th Austrian Stochastic Days, September 13-14, 2018, WU Vienna.

 

``Optimal High-Risk Investment'', WU Brown-bag seminar in Finance, WU Vienna, Vienna; May 8, 2019.

 

``Optimal High-Risk Investment - The Limited Information Case'', 8th Austrian Stochastic Days, September 10-11, 2020, University of Graz.

 

''Hunting for Superstars'', with M. Meier, Mathematics and Financial Economics, Vol. 53, 335-371 [https://doi.org/10.1007/s11579-023-00337-9]

 

Abstract: The “superstar economy” is characterized by payoff functions that depend in a discontinuous way on the quality level of the corresponding products and services. Firm A might generate much higher returns than firm B, although A’s product is only marginally superior to B’s product. We look at an investor who considers to invest into start-ups that want to become active in one particular technological segment. Consequently, only the very best few projects generate high returns. The investor is faced with a sequence of investment opportunities, observes the objective relative rankings of the corresponding projects seen so far, and must decide whether and how much to invest into the currently observed opportunity. Returns are realized at the end of the investment horizon. We derive the value functions and optimal investment rules for risk-neutral and risk averse investors. Under weak assumptions, the expected infinite horizon utility exceeds that of initial wealth. We show that for a risk-neutral investor “invest all or nothing”, depending on the project’s ranking and time of occurrence, is an optimal strategy. For a risk-averse investor the optimal rule is non-linear and path dependent. A simulation study is performed for risk-neutral and log-utility investors.

 

“Optimal High-risk Investment”, Martin Meier, Leopold Sögner and Gregor Kastner

 

Version at SSRN: https://ssrn.com/abstract=4546624.

 

Abstract: This article extends the investment model of Bruss and Ferguson (2002), where an investor observes a sequence of T investment alternatives, each endowed with a quality characteristic. The information available at any period is the current and all prior quality characteristics. The investor has to decide whether to invest in the same period the project shows up. Finally, after the last investment alternative has shown up, those n projects with highest realized quality characteristics generate positive gross-returns which depend on their relative ranking, while the payoffs of all other projects are zero. Under these assumptions we derive a recursive formulation of the value function for risk-neutral or risk-averse investors. We show that value function is a sum of expected utilities arising from past investments and a residual term which describes the expected utility contribution from investing the remaining wealth optimally. The first part is closed from while the residual term has to be obtained recursively. Optimal vestment rules follow from past observations and this residual term. A simulation study demonstrates how optimal investment decisions are affected by the time horizon and by the attitudes towards risk. In addition, we provide sufficient conditions under that the value function is non-increasing in the number of periods T.

 


 

Measuring uncertainty to identify financial instability

Project Lead: Jaroslava Hlouskova
Team: Ines Fortin, Leopold Sögner
Duration: April 2019 – October 2021
Funding: Jubiläumsfonds Project 18115

This project introduces a new index measuring financial (in)stability in Austria and in the Euro area. The new index is a so-called uncertainty index, which is methodologically fundamentally different from existing financial stability indicators. While financial stability indicators measure the level of (in)stability in a financial system, our new `stress uncertainty index' measures the degree of predictability of (in)stability.

 

Publications and Presentations:

 

Ines Fortin (presenting), Jaroslava Hlouskova, Leopold Sögner: Financial instability and economic activity, 15th International Conference on Computational and Financial Econometrics (CFE 2021), London, Dezember 2021.

 

''Financial and economic uncertainties and their effects on the economy”, with Ines Fortin and Jaroslava Hlouskova, Empirica, 2023, Vol. 50, pp. 481-521.

[https://doi.org/10.1007/s10663-023-09570-3]

 

Abstract: We estimate new indices measuring financial and economic uncertainty in the euro area, Germany, France, the United Kingdom and Austria, following the approach of Jurado et al. (Am Econ Rev 105:1177–1216, 2015), which measures uncertainty by the degree of predictability. We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of both local and global uncertainty shocks on industrial production, employment and the stock market. We find that global financial and economic uncertainties have significant negative effects on local industrial production, employment, and the stock market, while we find hardly any influence of local uncertainty on these variables. In addition we perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different performance measures. The results suggest that financial uncertainty significantly improves the forecasts of the stock market in terms of profit-based measures, while economic uncertainty gives, in general, more insight when forecasting macroeconomic variables.


Monitoring Structural Change in Vector Error Correction Models

Project Lead: Leopold Sögner
Team: Ines Fortin, Masoud Abdollahi Mobarakeh, Martin Wagner
Duration: April 2022 – March 2025
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Funds - Project Number 18766

This research project develops and applies econometric tools to perform online break-point detection (monitoring) in a Johansen (1995)-type vector error correction model. To monitor structural changes the break-point detection procedures of Seo (1998) and Hansen and Johansen (1999) are planned to be adapted to the monitoring case. The monitoring tools are applied to investigate the stability of money demand and some arbitrage parities discussed in finance literature. The tools are made available in an R-package.

 

Publications and Presentations:

 

''Eigenvalue based monitoring of structural breaks in error correction models'',

15th International Conference on Computational and Financial Econometrics (CFE'21)}, 18-20 December 2021, London and virtual conference.

 

''Mixed-Frequency Dynamic Factor Models'', 16th International Conference on Computational and Financial Econometrics (CFE'22), 17-19 December 2022, King's College, London. %vortrag 17.12.2022

 

``Retrieval from Mixed Sampling Frequency: Generic Identifiability in the Unit Root VAR'', Tenth Italian  Congress of Econometrics and Empirical Economics,

University of Cagliari, 26-28 May 2023.

 

''Monitoring of Structural Breaks in Error Correction Models'', 17th International Conference on Computational and Financial Econometrics (CFE'23), 16-18 December 2023, Hochschule für Technik und Wirtschaft, Berlin. (presented by Masoud Abdollahi Mobarakeh)

 

''Open-End Monitoring of Structural Breaks in the Cointegration VAR'', 17th International Conference on Computational and Financial Econometrics (CFE'23), 16-18 December 2023, Hochschule für Technik und Wirtschaft, Berlin.

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Resilience in Economic Systems

Project Lead: Martin Meier
Team: Lawrence Blume (Cornell University and IHS Vienna), Aleksandra Lukina (Harris School of Public Policy, University of Chicago), Martin Meier (University of Bath and IHS Vienna, PI), Leopold Sögner (IHS Vienna and VGSF), Stefan Thurner (Medical University of Vienna and Complexity Science Hub, Vienna).
Duration: July 2023 – June 2027
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Funds - Project Number 18789

Economies around the world have been ``shut-down'' by the novel coronavirus SARS-CoV-2.  Literally: Stores have closed their doors, manufacturing plants have shut down, and commerce has slowed to a crawl. Bringing the economy back is a gigantic coordination problem; shops cannot reopen until their suppliers do, those suppliers in turn need inputs, and so forth.   

In particular, we want to understand how the nature of global supply chains affects the length of time it will take for the economy to recover, to get back on path. We propose to see in a first part what we can learn from theoretical models, in a second part we plan to use empirical data to obtain estimates on recovery times.

 


Sustainable investment under prospect theory

Project Lead: Ines Fortin
Team: Jaroslava Hlouskova, Leopold Sögner
Duration: November 2022 – November 2024
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Funds - Project Number 18798

Sustainable investing, also known as ESG (environmental, social, and corporate governance) investing, has been gaining in importance over the past years. In this project, we plan to implement portfolio strategies for agents with prospect theory preferences, where also ESG factors are accounted for. We consider an investor with mixed prospect theory and ESG preferences, who decides on the allocation of her wealth, towards risky assets and one risk-free asset. We aim to find the closed form solution for this non-differentiable and convex-concave problem, putting certain assumptions on the risky assets and on the ESG preferences. In the empirical part, we find the optimal solution implied by our new investment strategy and assess the portfolio performance implied by different scenarios reflecting the presence of certain habits combined with sustainable investment. Finally, we compare the ESG prospect theory portfolio with portfolios implied by other types of investors. In addition to traditional performance measures we employ measures combining return, risk and ESG aspects in order to assess the various investment strategies. We plan to consider different sectoral indices for the European and the US stock markets, for which ESG scores need to be constructed.


 

Bayesian estimation of DSGE models using global nonlinear approximations and hierarchical continuation

| Macroeconomics and Business Cycles

Project Lead: Tamas Papp
Team: Michael Reiter, Leopold Sögner
Duration: March 2023 – February 2025
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Funds - Project Number 18847

Macroeconomic models used for understanding and forecasting GDP, employment, investment, and consumption have a lot of parameters that determine the preferences of consumers and firms, the technological constraints, labor market and investment frictions, and how prices react to monetary policy.

These parameters need to be estimated from past data. The most advanced statistical methodology for this is Bayesian estimation, but with current tools it is only feasible in practice for complex models when a linear approximation of a model is used. While for some models this provides satisfactory results, for other models, such as monetary policy models which take into account the fact that nominal interest rates cannot be negative, or models of uncertainty shocks, nonlinearities are important and need to be accounted for.

This project aims to develop a practical methodology for estimation of mid-size macroeconomics models, such as those used by central banks and forecasting institutions, in their full nonlinear form, using a global approximation combined with recent methodological advances in computational statistics. The resulting software suite, documentation, and examples will be made available under a free software license.