JUAN CARLOS ESCANCIANO, Indiana University Bloomington - Department of Economics
Email: jescanci@indiana.edu

This article investigates model checks for a class of possibly nonlinear heteroskedastic time series models, including but not restricted to ARMA-GARCH models. We propose omnibus tests based on functionals of certain weighted standardized residual empirical processes. The new tests are asymptotically distribution-free, suitable when the conditioning set is inÂ…nite-dimensional, and consistent against a class of Pitman's local alternatives converging at the parametric rate n1=2; with n the sample size. A Monte Carlo study shows that the simulated level of the proposed tests is close to the asymptotic level already for moderate sample sizes and that tests have a satisfactory power performance. Finally, we illustrate our methodology with an application to the well-known S&P 500 daily stock index. The paper also contains an asymptotic uniform expansion for weighted residual empirical processes when initial conditions are considered, a result of independent interest.

RICHARD K. GREEN, George Washington University
Email: drgreen@gwu.edu
SUSAN M. WACHTER, University of Pennsylvania - The Wharton School - Real Estate Department
Email: wachter@finance.wharton.upenn.edu

While other countries dismantled their segmented housing finance systems and linked housing finance to capital markets through deregulated depositories, the US linked housing finance to capital markets through depository deregulation and securitization. Elsewhere securitization has not developed. The US provided the underpinnings for its mortgage security infrastructure with the creation of FNMA in 1938 and in order to create liquidity in the mortgage market required the standardization of mortgage documentation and more fundamentally required that home mortgages within securities would be sufficiently homogeneous that they could trade in liquid markets. These developments allowed 22 years of uninterrupted liquidity in the market for conventional conforming mortgages, to be followed by the creation of a subprime mortgage market backed by securities that were illiquid, nonstandardized and marked to model not to market which allowed systemic underpricing of risk. This paper presents the recent history of the linkage of mortgage funding to financial markets in the US and elsewhere and specifically in the US suggests how the housing finance revolution resulted in the "terror" which has brought down global financial markets.

SCOTT JOSLIN, Massachusetts Institute of Technology
Email: sjoslin@mit.edu
KENNETH J. SINGLETON, Stanford Graduate School of Business
Email: KEN@FUTURE.STANFORD.EDU
HAOXIANG ZHU, Stanford Graduate School of Business
Email: howardz@stanford.edu

This paper shows that, within any Gaussian dynamic term structure model (GDTSM), the historical distribution of the pricing factors P is invariant to the imposition of no-arbitrage restrictions, as well as to additional constraints that impinge only on the risk-neutral dynamics of P. It follows that, in these settings, GDTSM-implied forecasts of future values of P are identical to those from an unrestricted vector autoregressive model of P. To establish these results, we develop a novel canonical GDTSM in which the pricing factors are observable portfolios of yields. For our normalization, standard maximum likelihood algorithms converge to the global optimum almost instantaneously. We also extend our analysis to GDTSMs with reduced-rank risk premiums and to those with macroeconomic variables as pricing factors. Empirical estimates and out-of-sample forecasting results are presented for several GDTSMs using data on U.S. Treasury bond yields.

YACINE AIT-SAHALIA, Princeton University - Department of Economics, National Bureau of Economic Research (NBER)
Email: yacine@princeton.edu
JEAN JACOD, Université Paris VI Pierre et Marie Curie
Email: SECRET@PROBA.JUSSIEU.FR

This paper describes a simple yet powerful methodology to decompose asset returns sampled at high frequency into their base components (continuous, small jumps, large jumps), determine the relative magnitude of the components, and analyze the �ner characteristics of these components such as the degree of activity of the jumps.

PERNILLE JESSEN, Aarhus School of Business, Aarhus University
Email: peje@asb.dk

Numerous institutions are now engaged in Socially Responsible Investment or have signed the "UN Principles for Responsible Investment". Retail investors, however, are still lacking behind. This is peculiar since the sector constitutes key stakeholders in environmental, social and governmental standards.

This paper considers optimal responsible investment for a small retail investor. It extends conventional portfolio theory by allowing for a personal-value based investment decision. Preferences for responsibility are defined in the framework of mean-variance analysis and an optimal responsible investment model identified. Also, it is considered how structured products may facilitate retail SRI.

Implications of the altered investment problem are investigated when the dynamics between portfolio risk, expected return and responsibility is considered. Relying on the definition of a responsible investor, it is shown how superior investment opportunities can emerge when the new dimension is incorporated into the investment decision.

MOHAMED ESSAIED HAMRITA, University of Monastir - Computational Mathematics Laboratory
Email: mhamrita@gmail.com
NIDHAL BEN ABDALLAH, University of Monastir - Computational Mathematics Laboratory
Email: nidhal.benabdallah@fsegm.rnu.tn
SAMIR BEN AMMOU, University of Monastir - Computational Mathematics Laboratory
Email: sam.ben@fsm.rnu.tn

This paper examines the multi-scale relationship between the interest rate, exchange rate and stock price using wavelet transform. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the interest rate, exchange rate and stock price for US over the period 1990:1- 2008:12 and using the definitions of wavelet variance, wavelet correlation and cross-correlations analyze the association as well as the lead/lag relationship between these series at the different time scales. Our results show that the relationship between interest rate and exchange rate is not significantly different from zero at all scales. On the other hand, the relationship between interest rate returns and stock index returns is significantly different zero only at the highest scales. The exchange rate returns and stock index returns have a relationship bidirectional in this period at longer horizons.