arXiv · arXiv q-fin · 2024
In this paper, we present an artificial neural network framework for portfolio compression of a large portfolio of European options with varying maturities (target portfolio) by a significantly smaller portfolio of European options with shorter or same maturity (compressed portfolio), which also represents a self-replicating static hedge portfolio of the target portfolio. For the proposed machine learning architectur…
Vikranth Lokeshwar Dhandapani, Shashi Jain
arXiv · arXiv q-fin · 2022
In portfolio compression, market participants (banks, organizations, companies, financial agents) sign contracts, creating liabilities between each other, which increases the systemic risk. Large, dense markets commonly can be compressed by reducing obligations without lowering the net notional of each participant (an example is if liabilities make a cycle between agents, then it is possible to reduce each of them wi…
Mihály Péter Hanics
arXiv · arXiv q-fin · 2002
We investigate an optimal investment problem with a general performance criterion which, in particular, includes discontinuous functions. Prices are modeled as diffusions and the market is incomplete. We find an explicit solution for the case of limited diversification of the portfolio, i.e. for the portfolio compression problem. By this we mean that an admissible strategies may include no more than m different stock…
Nikolai Dokuchaev, Ulrich Haussmann
arXiv · arXiv · 2023
Finding the hedge ratios for a portfolio and risk compression is the same mathematical problem. Traditionally, regression is used for this purpose. However, regression has its own limitations. For example, in a regression model, we can't use highly correlated independent variables due to multicollinearity issue and instability in the results. A regression model cannot also consider the cost of hedging in the hedge ra…
Ali Shirazi, Fereshteh Sadeghi Naieni Fard
arXiv · arXiv · 2026
In 1956 John Kelly wrote a paper at Bell Labs describing the relationship between gambling and Information Theory. What came to be known as the Kelly Criterion is both an objective and a closed-form solution to sizing wagers when odds and edge are known. Samuelson argued it was arbitrary and subjective, and successfully kept it out of mainstream economics. Luckily it lived on in computer science, mostly because of To…
Oscar Stiffelman
arXiv · arXiv q-fin · 2026
Public blockchains can make many trading venues simultaneously visible and mechanically reachable, yet an order still has to pay to activate each additional venue: technological connectivity need not translate into economically integrated execution. Automated-market-maker (AMM) pools make this gap directly measurable, because exact pre-trade venue states, transaction-level routing costs, and realized venue use can be…
Wen-Ting Wang
arXiv · arXiv q-fin · 2026
Current post-trade clearing systems rely almost exclusively on cash or cash-like collateral, leaving vast reserves of short-term liquidity embedded in trade credit outside formal settlement infrastructures. A key barrier to integrating this liquidity is the near-universal dependence of clearing services on novation, which imposes institutional overhead that restricts accessibility and limits the range of obligations …
Tomaž Fleischman, Ethan Buchman
arXiv · arXiv q-fin · 2025
Financial markets often appear chaotic, yet ranges are rarely accidental. They emerge from structured interactions between market context and capital conditions. The four-hour timeframe provides a critical lens for observing this equilibrium zone where institutional positioning, leveraged exposure, and liquidity management converge. Funding mechanisms, especially in perpetual futures, act as disciplinary forces that …
Habib Badawi, Mohamed Hani, Taufikin Taufikin
arXiv · arXiv q-fin · 2025
We present a deep learning framework for pricing options based on market-implied volatility surfaces. Using end-of-day S\&P 500 index options quotes from 2018-2023, we construct arbitrage-free volatility surfaces and generate training data for American puts and arithmetic Asian options using QuantLib. To address the high dimensionality of volatility surfaces, we employ a variational autoencoder (VAE) that compresses …
Lijie Ding, Egang Lu, Kin Cheung
arXiv · arXiv q-fin · 2017
Over-the-counter markets are at the center of the postcrisis global reform of the financial system. We show how the size and structure of such markets can undergo rapid and extensive changes when participants engage in portfolio compression, a post-trade netting technology. Tightly-knit and concentrated trading structures, as featured by many large over-the-counter markets, are especially susceptible to reductions of…
Marco D'Errico, Tarik Roukny
arXiv · arXiv q-fin · 2009
This paper is part of an ongoing investigation of "pragmatic information", defined in Weinberger (2002) as "the amount of information actually used in making a decision". Because a study of information rates led to the Noiseless and Noisy Coding Theorems, two of the most important results of Shannon's theory, we begin the paper by defining a pragmatic information rate, showing that all of the relevant limits make sen…
Edward D. Weinberger
arXiv · arXiv q-fin · 2026
Automated market makers (AMMs) are a cornerstone of decentralised finance (DeFi). Constant product markets with concentrated liquidity, such as UniswapV3, are now a well-established design. In these markets, liquidity providers (LPs) face a sequential decision problem: they must decide when to rebalance their positions and which price ranges to allocate capital to as market conditions evolve. We formulate dynamic liq…
Georgios Chionas, Charalampos Kleitsikas, Stefanos Leonardos, Leandro Sánchez-Betancourt, Carmine Ventre
arXiv · arXiv · 2026
Financial markets such as bond, derivatives, and repo markets form networks of interdependent obligations. Existing multilateral netting methods typically trade off the extent of netting against preservation of counterparty exposure: central clearing reallocates exposure to a central counterparty, while trade compression may alter bilateral counterparty relationships. TradeMech is a mechanism for markets in which one…
Daniel Aronoff, Robert M. Townsend, Madars Virza
arXiv · arXiv q-fin · 2026
This paper investigates how similarity in the informational representation of market states among Artificial Intelligence (AI) trading agents can generate systemic instability in financial markets. We construct a structural multi-agent market model calibrated using high-frequency microstructural moments. AI agents are modeled through a two-layer decision architecture consisting of a nonlinear representation layer and…
Yimeng Qiu, Qiwei Han