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In this paper, we propose a methodology based on piece-wise homogeneous Markov chain for credit ratings and a multivariate model of the credit spreads to evaluate the financial risk in European Union (EU). Two main aspects are considered: how the financial risk is distributed among the European countries and how large is the value of the total risk. The first aspect is evaluated by means of the expected value of a dy…
We propose an option approach for pricing bond illiquidity that is reminiscent of the celebrated work of Longstaff (1995) on the non-marketability of some non-dividend-paying shares in IPOs. This approach describes a quite common situation in the fixed income market: it is rather usual to find issuers that, besides liquid benchmark bonds, issue some other bonds that either are placed to a small number of investors in…
For the last two decades, most financial markets have undergone an evolution toward electronification. The market for corporate bonds is one of the last major financial markets to follow this unavoidable path. Traditionally quote-driven i.e., dealer-driven) rather than order-driven, the market for corporate bonds is still mainly dominated by voice trading, but a lot of electronic platforms have emerged. These electro…
There are two predominant metrics to assess the performance of automated market makers and their profitability for liquidity providers: 'impermanent loss' (IL) and 'loss-versus-rebalance' (LVR). In this short paper we shed light on the statistical aspects of both concepts and show that they are more similar than conventionally appreciated. Our analysis uses the properties of a random walk and some analytical properti…
In this paper, we employ Credit Default Swaps (CDS) to model the joint and conditional distress probabilities of banks in Europe and the U.S. using factor copulas. We propose multi-factor, structured factor, and factor-vine models where the banks in the sample are clustered according to their geographic location. We find that within each region, the co-dependence between banks is best described using both, systematic…
In this paper, we consider pricing of European options and spread options for Hawkes-based model for the limit order book. We introduce multivariate Hawkes process and the multivariable general compound Hawkes process. Exponential multivariate general compound Hawkes processes and limit theorems for them, namely, LLN and FCLT, are considered then. We also consider a special case of one-dimensional EMGCHP and its limi…
We study time-zero efficiency of electricity derivatives markets. By time-zero efficiency is meant a sequence of prices of derivatives contracts having the same underlying asset but different times to maturity which implies that prices comply with a set of efficiency conditions that prevent profitable time-zero arbitrage opportunities. We investigate whether statistical tests, based on the law of one price, and tradi…
Automated market makers (AMM) have grown to obtain significant market share within the cryptocurrency ecosystem, resulting in a proliferation of new products pursuing exotic strategies for horizontal differentiation. Yet, their theoretical properties are curiously homogeneous when a set of basic assumptions are met. In this paper, we start by presenting a universal approach to deriving a formula for liquidity provisi…
Several proposals for the reform of the euro area advocate the creation of a market in synthetic securities backed by portfolios of sovereign bonds. Most debated are the so-called European Safe Bonds or ESBies proposed by Brunnermeier, Langfield, Pagano,Reis, Van Nieuwerburgh and Vayanos (2017). The potential benefits of ESBies and other bond-backed securities hinge on the assertion that these products are really saf…
This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the i…
During the last two years, Europe has been facing a debt crisis, and Greece has been at its center. In response to the crisis, drastic actions have been taken, including the halving of Greek debt. Policy makers acted because interest rates for sovereign debt increased dramatically. High interest rates imply that default is likely due to economic conditions. High interest rates also increase the cost of borrowing and …
Public debt is one of the important economic variables that quantitatively describes a nation's economy. Because bankruptcy is a risk faced even by institutions as large as governments (e.g. Iceland), national debt should be strictly controlled with respect to national wealth. Also, the problem of eliminating extreme poverty in the world is closely connected to the study of extremely poor debtor nations. We analyze t…
In this study, we have investigated empirically the effects of market properties on the degree of diversification of investment weights among stocks in a portfolio. The weights of stocks within a portfolio were determined on the basis of Markowitz's portfolio theory. We identified that there was a negative relationship between the influence of market properties and the degree of diversification of the weights among s…
Divergence measures are essential tools for detecting distributional shifts in model monitoring, particularly crucial given the volatility of financial data. While the Population Stability Index is the most widely used measure, Jensen-Shannon Divergence and Kullback-Leibler Divergence offer distinct advantages. Jensen-Shannon Divergence handles mixture models, addresses zero-binning problems, and is symmetric, while …
This paper emphasizes the critical role of interoperability in enabling efficient and secure communication for the fragmented distributed ledger ecosystem, particularly within on-chain finance. The purpose of this study is to streamline and accelerate empirical research on the intersection of cross-chain interoperability solutions and their impact within on-chain finance. The analysis examines the relationship betwee…
This paper examines whether a major U.S. regulatory clarification coincided with cross-border spillovers in crypto-asset entrepreneurial finance. We study the Securities and Exchange Commission's July 2017 DAO Report, which clarified the application of U.S. securities law to many initial coin offerings, and analyze how global issuance activity adjusted across regions. Using a comprehensive global dataset of ICOs from…
We present a study of the short-maturity asymptotics for VIX and European option prices in local-stochastic volatility models with compound Poisson jumps. Both out-of-the-money (OTM) and at-the-money (ATM) asymptotics are considered. The leading-order asymptotics are obtained in closed-form. We apply our results to three examples: the Eraker model, a Kou-type model, and a folded normal model. Numerical illustrations …
The European Union Emissions Trading System (EU ETS), the world's first and largest cap-and-trade carbon market, is a cornerstone of EU climate policy. This study provides a comprehensive empirical analysis of the EU carbon market's efficiency, price dynamics, and structural network from 2010 to 2020. First, we identify significant price clustering and short-term return predictability using an AR-GARCH model, achievi…
Positional encodings inject order into a permutation-invariant attention mixer so the model knows that token i is not token j.
Black-Scholes is the European option formula under lognormal spot, constant vol, and continuous hedging — a quoting convention more than a belief about the world.
Put-call parity is the no-arbitrage link C − P = F − K (discounted) — a European call and put with the same K and T are one instrument plus cash.
The Coase theorem says that if property rights are clear and bargaining is costless, parties will bargain to an efficient outcome regardless of who holds the initial right — the assignment affects distribution, not efficiency.
The Keynesian multiplier is how much equilibrium output changes for a one-unit change in autonomous spending, set by the marginal propensity to consume and leakages (tax, imports).
China Property Cycle — Developer stress and land sales impacting global commodities and EM growth.
Europe Periphery Spreads — BTP-Bund and similar spreads as euro-area fragmentation gauges.
The euro-area sovereign crisis (2010–12) was a doom loop of weak banks and weak sovereigns inside a currency union without a joint fiscal or a trusted LOLR — until OMT and ‘whatever it takes.’
Evergrande’s 2021 missed payments opened a still-running Chinese property and LGFV credit squeeze — a developer-leverage and pre-sale trust crisis under a political deleveraging campaign.
The ECB balance sheet reflects the scale of European Central Bank asset holdings and helps track euro-area liquidity, policy transmission, and duration absorption.
The law of iterated expectations says E[E[X | finer info]] = E[X | coarser info] — you cannot improve an expectation by forgetting information, and towers of forecasts must nest.
Black-Scholes is the European option formula under lognormal spot, constant vol, and continuous hedging — a quoting convention more than a belief about the world.
China Property Cycle — Developer stress and land sales impacting global commodities and EM growth.
The Coase theorem says that if property rights are clear and bargaining is costless, parties will bargain to an efficient outcome regardless of who holds the initial right — the assignment affects distribution, not efficiency.
The ECB balance sheet reflects the scale of European Central Bank asset holdings and helps track euro-area liquidity, policy transmission, and duration absorption.
Europe Periphery Spreads — BTP-Bund and similar spreads as euro-area fragmentation gauges.
The euro-area sovereign crisis (2010–12) was a doom loop of weak banks and weak sovereigns inside a currency union without a joint fiscal or a trusted LOLR — until OMT and ‘whatever it takes.’
Evergrande’s 2021 missed payments opened a still-running Chinese property and LGFV credit squeeze — a developer-leverage and pre-sale trust crisis under a political deleveraging campaign.
The Keynesian multiplier is how much equilibrium output changes for a one-unit change in autonomous spending, set by the marginal propensity to consume and leakages (tax, imports).
Put-call parity is the no-arbitrage link C − P = F − K (discounted) — a European call and put with the same K and T are one instrument plus cash.