OpenAlex · Review of Financial Studies · 2022 · cites 55
Abstract Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40$\%$ of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical s…
Zhiguo He, Paymon Khorrami, Zhaogang Song
arXiv · arXiv · 2022
Uniswap is a Constant Product Market Maker built around liquidity pools, where pairs of tokens are exchanged subject to a fee that is proportional to the size of transactions. At the time of writing, there exist more than 6,000 pools associated with Uniswap v3, implying that empirical investigations on the full ecosystem can easily become computationally expensive. Thus, we propose a systematic workflow to extract an…
Deborah Miori, Mihai Cucuringu
arXiv · arXiv · 2021
Trading in Over-The-Counter (OTC) markets is facilitated by broker-dealers, in comparison to public exchanges, e.g., the New York Stock Exchange (NYSE). Dealers play an important role in stabilizing prices and providing liquidity in OTC markets. We apply machine learning methods to model and predict the trading behavior of OTC dealers for US corporate bonds. We create sequences of daily historical transaction reports…
Yusen Lin, Jinming Xue, Louiqa Raschid
arXiv · arXiv · 2018
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an exogenous open market with finite liquidity. This endogenously leads to transient price impact in the dealer market. Smoot…
Peter Bank, Ibrahim Ekren, Johannes Muhle-Karbe
arXiv · arXiv · 2015
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…
Jean-David Fermanian, Olivier Guéant, Jiang Pu
arXiv · arXiv · 2026
This paper studies the impact of funding market frictions on bond prices and market-wide liquidity. Using proprietary transaction-level data on all gilt-backed repo and reverse-repo trades, we demonstrate how the market power of individual dealers and their linkages generate frictions. Specifically, we show that frictions related to market power account for between 0.5 and 1.3 percentage points of bond yield deviatio…
Carlos Canon, Eddie Gerba, Jozef Barunik
arXiv · arXiv · 2023
This paper explores the utility of agent-based simulations in realistically modelling market structures and sheds light on the nuances of optimal dealer strategies. It underscores the contrast between conclusions drawn from probabilistic modelling and agent-based simulations, but also highlights the importance of employing a realistic test bed to analyse intricate dynamics. This is achieved by extending the agent-bas…
Wladimir Ostrovsky
arXiv · arXiv · 2022
In FX cash markets, market makers provide liquidity to clients for a wide variety of currency pairs. Because of flow uncertainty and market volatility, they face inventory risk. To mitigate this risk, they typically skew their prices to attract or divert the flow and trade with their peers on the dealer-to-dealer segment of the market for hedging purposes. This paper offers a mathematical framework to FX dealers will…
Alexander Barzykin, Philippe Bergault, Olivier Guéant
arXiv · arXiv · 2021
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open market to hedge their position and reduce their inventory (externalization). Of course, the better control associated with externalization comes with transaction costs and market impac…
Alexander Barzykin, Philippe Bergault, Olivier Guéant
arXiv · arXiv · 2021
In dealer markets, dealers provide prices at which they agree to buy and sell the assets and securities they have in their scope. With ever increasing trading volume, this quoting task has to be done algorithmically in most markets such as foreign exchange markets or corporate bond markets. Over the last ten years, many mathematical models have been designed that can be the basis of quoting algorithms in dealer marke…
Alexander Barzykin, Philippe Bergault, Olivier Guéant
arXiv · arXiv · 2019
Market makers play an important role in providing liquidity to markets by continuously quoting prices at which they are willing to buy and sell, and managing inventory risk. In this paper, we build a multi-agent simulation of a dealer market and demonstrate that it can be used to understand the behavior of a reinforcement learning (RL) based market maker agent. We use the simulator to train an RL-based market maker a…
Sumitra Ganesh, Nelson Vadori, Mengda Xu, Hua Zheng, Prashant Reddy
arXiv · arXiv · 2026
We investigate the optimal execution of contracts that are used in merger\&acquisition deals. We consider cash-settled and physically delivered contracts between a broker and a counterpart. Contracts are linear (total returns swaps), nonlinear (collar contracts) or Asian type (TWAP based contracts). We derive the optimal execution strategy and the optimal fee through indifference utility arguments allowing for linear…
Emilio Barucci, Yuheng Lan, Daniele Marazzina
arXiv · arXiv · 2024
We process private equity transactions to predict public market behavior with a logit model. Specifically, we estimate our model to predict quarterly returns for both the broad market and for individual sectors. Our hypothesis is that private equity investments (in aggregate) carry predictive signal about publicly traded securities. The key source of such predictive signal is the fact that, during their diligence pro…
Paolo Barucca, Flaviano Morone
arXiv · arXiv · 2019
We take a closer look at the life and legacy of Micheal Milken. We discuss why Michael Milken, also know as the Junk Bond King, was not just any other King or run-of-the-mill Junk Dealer, but "The Junk Dealer". We find parallels between the three parts to any magic act and what Micheal Milken did, showing that his accomplishments were nothing short of a miracle. His compensation at that time captures to a certain ext…
Ravi Kashyap
arXiv · arXiv · 2016
We use a principal-agent model to analyze the structure of a book-driven dealer market when the dealer faces competition from a crossing network or dark pool. The agents are privately informed about their types (e.g. their portfolios), which is something that the dealer must take into account when engaging his counterparties. Instead of trading with the dealer, the agents may chose to trade in a crossing network. We …
Jana Bielagk, Ulrich Horst, Santiago Moreno--Bromberg
arXiv · arXiv · 2015
In this paper, the optimal pricing strategy in Avellande-Stoikov's for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers' trading intensities, their optimal bid and ask prices and therefore their spreads are derived when the dealers are informed the severity of the competition. The effects of various parameters on the bid-ask quotes and pr…
Wai-Ki Ching, Jia-Wen Gu, Qing-Qing Yang, Tak-Kuen Siu
arXiv · arXiv · 2011
We consider idealized financial markets in which price paths of the traded securities are cadlag functions, imposing mild restrictions on the allowed size of jumps. We prove the existence of quadratic variation for typical price paths, where the qualification "typical" means that there is a trading strategy that risks only one monetary unit and brings infinite capital if quadratic variation does not exist. This resul…
Vladimir Vovk
arXiv · arXiv · 2010
This paper considers possible price paths of a financial security in an idealized market. Its main result is that the variation index of typical price paths is at most 2, in this sense, typical price paths are not rougher than typical paths of Brownian motion. We do not make any stochastic assumptions and only assume that the price path is positive and right-continuous. The qualification "typical" means that there is…
Vladimir Vovk