Papers by Dimitrios Thomakos
How well can social scientists predict societal change, and what processes underlie their predict... more How well can social scientists predict societal change, and what processes underlie their predictions? To answer these questions, we ran two forecasting tournaments testing accuracy of predictions of societal change in domains commonly studied in the social sciences: ideological preferences, political polarization, life satisfaction, sentiment on social media, and gender-career and racial bias. Following provision of historical trend data on the domain, social scientists submitted pre-registered monthly forecasts for a year (Tournament 1; N=86 teams/359 forecasts), with an opportunity to update forecasts based on new data six months later (Tournament 2; N=120 teams/546 forecasts). Benchmarking forecasting accuracy revealed that social scientists’ forecasts were on average no more accurate than simple statistical models (historical means, random walk, or linear regressions) or the aggregate forecasts of a sample from the general public (N=802). However, scientists were more accurate ...
Chartered Banker, Jul 1, 2019
Time series dominate the information bankers use when they need a meaningful estimate of the futu... more Time series dominate the information bankers use when they need a meaningful estimate of the future. This is complemented often by narrative or even richer information. So, for example, a statement and probably a press conference will accompany a balance sheet of a major corporation. Nevertheless, a longitudinal sequence of meaningful numerical observations (for example number of loans per period, a stock index, an asset price, etc), and their respective projections in the future, drive our decisions in most decisionmaking contexts. Whatever works To that end, one question comes to mind: what time series forecasting method should we use? Nowadays the forecasting arsenal is so rich, ranging from exponential smoothing approaches (dating back to the 1950s) to AI, machine-and deep-learning methods. Nevertheless, despite theoretical advances in analytics, statistics and econometrics, still as of today no method fits all! No method can forecast consistently better in all contexts: there are horses for courses, and even these unfortunately change over time.
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OPERATING ASSETS” Copyright belongs to the author. Small sections of the text, not exceeding thre... more OPERATING ASSETS” Copyright belongs to the author. Small sections of the text, not exceeding three paragraphs, can be used provided proper acknowledgement is given. The Rimini Centre for Economic Analysis (RCEA) was established in March 2007. RCEA is a private, non-profit organization dedicated to independent research in Applied and Theoretical Economics and related fields. RCEA organizes seminars and workshops, sponsors a general interest journal The Review of Economic Analysis, and organizes a biennial conference: Small Open Economies in the Globalized World (SOEGW). Scientific work contributed by the RCEA Scholars is published in the RCEA Working Papers series. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Rimini Centre for Economic Analysis.
Distance-based nearest neighbour forecasting with application to exchange rate predictability
IMA Journal of Management Mathematics, 2020
Forecasting non-stationary time series, especially when the data generating processes contains a ... more Forecasting non-stationary time series, especially when the data generating processes contains a random walk component, is a difficult and sometimes impossible task. In this paper we suggest an intuitive, computationally fast and expedient way of forecasting time series of the above type using distance-based nearest neighbours (NN). We exploit to advantage the path and scale dependence present in a random walk model and so we provide a number of theoretical results (a) on the distances used for selecting the NN, (b) on a number of new forecasting models that use these distances and (c) on the properties of the resulting forecasts. We illustrate the efficacy of our method via a comprehensive empirical application on time series of exchange rates and commodities, where we present the resulting performance enhancements and discuss the importance of such results in a decision-making context, linking our forecasting approach with management mathematics and predictive analytics problems.
Managerial and Decision Economics, 2018
This paper is a critical review of the problems of the Greek tax system. A well-structured tax sy... more This paper is a critical review of the problems of the Greek tax system. A well-structured tax system promotes allocative efficiency and supports economic growth, whereas on the contrary current Greek reality translates to nontransparency, complexity, and tax corruption: all of them constitute regulatory failure. Using data, which refer to detailed tax information on certain years, starting in 2006 and ending in 2011, and data on the total back taxes owed to the Greek state, we highlight both the problems but more importantly the need to restructure the Greek tax system to finally promote economic growth and not crony capitalism.
EXSSA: SSA-based reconstruction of time series via exponential smoothing of covariance eigenvalues
International Journal of Forecasting, 2017
A critical aspect of singular spectrum analysis (SSA) is the reconstruction of the original time ... more A critical aspect of singular spectrum analysis (SSA) is the reconstruction of the original time series under various assumptions about its underlying structure. This reconstruction depends on the choice of the components from the covariance decomposition of the trajectory matrix. In most applications, this selection is based on the prior knowledge and experience of the researcher and a variety of practical rules. This paper suggests an alternative “fully automated” approach where all components of the covariance decomposition are used via exponential smoothing of the covariance eigenvalues. We illustrate the validity of the proposed approximation via simulations on different data generating processes. A second contribution of the paper is the proposal of a “forecast revision” algorithm which combines SSA with a benchmark. An empirical exercise using four key macroeconomic variables shows how this method can be used to improve the out-of-sample forecasts of any given benchmark model. Our results suggest that the proposed method has the potential to partly automate the use of SSA.
Functional smoothing for risk management of energy assets
International Journal of Energy and Statistics, 2016
In this paper we propose a new method for constructing single-asset investment strategies that ca... more In this paper we propose a new method for constructing single-asset investment strategies that can be used for hedging and risk management, with emphasis on the highly volatile energy asset class. The method consists of exploiting three stylized facts of asset returns, momentum, mean reversion and bubbles, by taking non-overlapping segments of the data that are used in a functional-type of analysis. We illustrate the workings of the proposed method with real data on two of the largest energy ETFs and the ETF for the S&P500. Our results show that the proposed method can perform substantially better than a simple rebalancing strategy or the buy and hold benchmark as it exhibits better risk return characteristics. More importantly, it appears that it can identify turning points relatively fast and is thus suitable for being used as a hedging and risk management tool in the highly unstable energy markets.
Energy Policy, 2016
Informational content of EPI is in large part explainable by the level of carbon intensity. Carbo... more Informational content of EPI is in large part explainable by the level of carbon intensity. Carbon intensity produces the correct, anticipated, negative sign in its relationship to EPI. Advanced countries should implement measures of high quality environmental content. Increasing GDP, while controlling emissions, is more appropriate for developing countries.
Improved Moving Average (IMA) Strategies
A modified version of, perhaps, the most widely used technical trading strategy – moving averages... more A modified version of, perhaps, the most widely used technical trading strategy – moving averages – is discussed in this article. The suggested approach combines cross-over "buy" signals and a dynamic threshold value which acts as a trailing stop. The trading behaviour and performance achieved using this modified strategy is different to the standard approach with results showing that, on average, the proposed modification increases the cumulative return and the Sharpe ratio of the investor while exhibiting smaller maximum drawdown and less of a drawdown duration than that obtained by using the standard moving average strategy.
Volatility Timing and Portfolio Construction Using Realized Volatility for the S&P500 Futures Index
Handbook of Portfolio Construction, 2010
Page 1. Chapter 28 Volatility Timing and Portfolio Construction Using Realized Volatility for the... more Page 1. Chapter 28 Volatility Timing and Portfolio Construction Using Realized Volatility for the S&P500 Futures Index Dimitrios D. Thomakos and Tao Wang 28.1 Introduction Volatility modeling is important for asset pricing, portfolio choice, option pricing, and risk management. ...
Market Timing Using Asset Rotation on ETFs
Quantitative Finance
The ultimate goal of any “paper” investment strategy is to achieve real-life profitability. This ... more The ultimate goal of any “paper” investment strategy is to achieve real-life profitability. This paper measures the performance of a simple technical trading rule based on the relative pricing and relative volatility of a rotation strategy between two assets, using data from passive ETFs. To avoid problems of pair selection we work with meta-data obtained after the evaluation of a large number of 351 pairs of ETFs. In this way we analyse the performance of the proposed strategy on the cross-section of different ETFs. Our results show that rotation trading, as applied in this paper, offers advantages even when the simplest model is used in generating trading signals. Furthermore, we find that the differences in the actual mean returns (over the evaluation period), the correlation of the pair components and to (a lesser extend) the volatilities of the ETFs can explain the success of the rotation strategies. Finally, our results indicate that – on average – rotation modelling outperfor...
Momentum Trading in New York Stock Exchange (Nyse) Energy Stocks
International Journal of Energy and Statistics, 2013
ABSTRACT This paper investigates whether the momentum effect exists in the NYSE energy sector. Mo... more ABSTRACT This paper investigates whether the momentum effect exists in the NYSE energy sector. Momentum is defined as the strategy that buys (sells) these stocks that are best (worst) performers, over a pre-specified past period of time (the 'look-back' period), by constructing equally weighted portfolios. Different momentum strategies are obtained by changing the number of stocks included in these portfolios, as well as the look-back period. Next, their performance is compared against two benchmarks: the equally weighted portfolio consisting of most stocks in the NYSE energy index and the market portfolio, and the S&P500 index. The results indicate that the momentum effect is strongly present in the energy sector, and leads to highly profitable portfolios, improving the risk-reward measures and easily outperforming both benchmarks.
TRADING ENERGY ETFs WITH AN IMPROVED MOVING AVERAGE STRATEGY
International Journal of Energy and Statistics, 2013
In this paper, the recently introduced improved moving average methodology in [1] is employed and... more In this paper, the recently introduced improved moving average methodology in [1] is employed and it is applied in two energy ETFs. It is compared to the standard moving average methodology and the buy and hold strategy. Investors who are interested in energy-related sectors and trade using averages, could benefit by forming their strategies based on this improved moving average methodology as it returns higher profits accompanied by decreased risk (measured in terms of drawdown).
CO<inf>2</inf> emissions, fuel mix, final energy consumption and regulation of renewable energy sources in the EU-15
2012 9th International Conference on the European Energy Market, 2012
ABSTRACT Global warning has emerged as the most prominent problem of our times. As such reducing ... more ABSTRACT Global warning has emerged as the most prominent problem of our times. As such reducing GHG emissions have become the centre of environmental policies across the globe. The EU wants to play a leading role to the direction of alleviating climate change and for that purpose has set targets to reduce GHG by 20% and raise the share of renewable energy to 20% by 2020. Regulation to promote RES is considered an important factor to achieve the target of reducing CO2 emissions. However, the link between CO2 emissions and regulation to promote RES use has drawn little attention to this point. The aim of this paper is to extend existing research on the link between CO2 emissions, fossil fuels and final energy consumption, by including Res regulation into the factors driving the evolution of CO2 emissions. We find that conditional upon fossil fuels consumption and final energy consumption, the effect of regulation to promote RES on CO2 emissions is negative and significant.
Optimal' Probabilistic Predictions of Financial Returns
SSRN Electronic Journal, 2007
ABSTRACT
“Out of Sync”: The Breakdown of Economic Sentiment Cycles in the EU
Review of International Economics, 2014
Page 1. Electronic copy available at: http://ssrn.com/abstract=2010775 “Out of sync”: The breakdo... more Page 1. Electronic copy available at: http://ssrn.com/abstract=2010775 “Out of sync”: The breakdown of economic sentiment cycles in the EU ∗ Dimitrios D. Thomakos† Fotis Papailias‡ This version: February 24, 2012 Abstract ...
Market timing and trading strategies using asset rotation: non-neutral market positioning for exploiting arbitrage opportunities
Quantitative Finance, 2013
ABSTRACT We present empirical results on the statistical and economic viability of a market timin... more ABSTRACT We present empirical results on the statistical and economic viability of a market timing and trading strategy that is based on a pairwise rotation between two risky assets. Using data on equity exchange traded funds, and models for both the returns and the volatility of the underlying assets, we compare the performance of the suggested models with the standard benchmarks of a buy-and-hold strategy and an equally weighted portfolio. The underlying intuition for the use of such a strategy rests with literature on sign and volatility predictability. The rotation strategy, as we apply it in this paper, is not risk-neutral and assumes the presence of arbitrage opportunities in the markets and short-term trends. Furthermore, the model specification uses the interplay between relative returns and relative volatilities in picking-up the asset with the highest return. Our results show that even a naive model that is based on a moving average of relative returns can outperform both benchmarks and that more elaborate specifications for the rotation model may yield additional performance gains. We also find that, in many cases, the rotation strategy yields statistically significant sign predictions of the relative returns and volatility. While our results are conditional on the data that we have used in our analysis they, nevertheless, support the market-timing literature and show that an active trading strategy can be based on the concept of rotation.
Corporate financing activities, fundamentals to price ratios and the cross section of stock returns
Journal of Economic Studies, 2013
PurposeThe purpose of the paper is to investigate the relation between the value/growth anomaly a... more PurposeThe purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free cash flow yield (free cash flows scaled by price).Design/methodology/approachThe paper utilizes portfolio‐level tests and cross‐sectional regressions.FindingsIn line with the literature on contrarian portfolios, this paper finds that firms with low (high) free cash flow yield are experiencing low (high) returns. However, only when an investor buys (sells) stocks of firms with high (low) free cash flow yield that distribute (raise) capital, his zero‐cost portfolio is significant. These findings are robust, irrespective of the financing vehicle (equity or debt). Overall, their evidence suggests that distinctions between the value/growth anomaly and the external financing anomaly partially disappear, if one is willing to employ free cash flow yield as a proxy of the former anomaly.Originality/valueThe ...
Stats, 2020
New results on volatility modeling and forecasting are presented based on the NoVaS transformatio... more New results on volatility modeling and forecasting are presented based on the NoVaS transformation approach. Our main contribution is that we extend the NoVaS methodology to modeling and forecasting conditional correlation, thus allowing NoVaS to work in a multivariate setting as well. We present exact results on the use of univariate transformations and on their combination for joint modeling of the conditional correlations: we show how the NoVaS transformed series can be combined and the likelihood function of the product can be expressed explicitly, thus allowing for optimization and correlation modeling. While this keeps the original “model-free” spirit of NoVaS it also makes the new multivariate NoVaS approach for correlations “semi-parametric”, which is why we introduce an alternative using cross validation. We also present a number of auxiliary results regarding the empirical implementation of NoVaS based on different criteria for distributional matching. We illustrate our fi...
Environmental Economics, 2017
A lot of emphasis is placed by the EU on developing strategies to combat climate change. Recogniz... more A lot of emphasis is placed by the EU on developing strategies to combat climate change. Recognizing that climate change and energy policies need to be integrated, the EU has developed the climate change and energy package to achieve emission and renewable energy deployment targets. To increase the share of renewables in the energy mix the European Commission promotes a common framework described in relevant directives, coordination of efforts across countries, and the use of policy instruments to promote Renewable Energy Sources (RES). This paper is interested in the effectiveness to reduce emissions of different sources of regulation implemented to promote RES and of the directive 2001/77/EC, the first directive for the promotion of RES. Using panel data on CO2 emissions from the EU-15 countries the authors decompose the effect on CO2 emissions of different types of RES promoting regulation, and we differentiate between the preand post-directive era. After this decomposition of RE...
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Papers by Dimitrios Thomakos