arXiv · arXiv · 2019
We propose a multi-factor polynomial framework to model and hedge long-term electricity contracts with delivery period. This framework has several advantages: the computation of forwards, risk premium and correlation between different forwards are fully explicit, and the model can be calibrated to observed electricity forward curves easily and well. Electricity markets suffer from non-storability and poor medium- to …
Xi Kleisinger-Yu, Vlatka Komaric, Martin Larsson, Markus Regez
arXiv · arXiv · 2020
This study introduces a new technique to recover the implicit discount factor in the derivative market using only European put and call prices: this discount is grounded in actual transactions in active markets. Moreover, this study identifies the implied cost of funding, over OIS, of major market players. Does a liquid equity market allow arbitrage? The key idea is that the (unique) forward contract -- built using t…
Michele Azzone, Roberto Baviera
arXiv · arXiv · 2019
We develop an optimal currency hedging strategy for fund managers who own foreign assets to choose the hedge tenors that maximize their FX carry returns within a liquidity risk constraint. The strategy assumes that the offshore assets are fully hedged with FX forwards. The chosen liquidity risk metric is Cash Flow at Risk (CFaR). The strategy involves time-dispersing the total nominal hedge value into future time buc…
Rongju Zhang, Mark Aarons, Gregoire Loeper
arXiv · arXiv q-fin · 2025
We develop a rigorous walk-forward validation framework for algorithmic trading designed to mitigate overfitting and lookahead bias. Our methodology combines interpretable hypothesis-driven signal generation with reinforcement learning and strict out-of-sample testing. The framework enforces strict information set discipline, employs rolling window validation across 34 independent test periods, maintains complete int…
Gagan Deep, Akash Deep, William Lamptey
arXiv · arXiv q-fin · 2008
In this work we derive an approximated no-arbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market under the LIBOR market model. A "convexity adjustment"-like correction is present in the related formula…
Damiano Brigo
arXiv · arXiv · 2026
This paper develops a three-currency Heath-Jarrow-Morton framework in which corporate credit is treated as a separate economy, connected to the nominal and real economies through synthetic inflation and credit exchange rates. The framework produces a testable identity. Under joint no-arbitrage, the credit spread of an issuer expressed over the inflation-rateindexed risk-free curve equals the same issuer's credit spre…
Raphael Coelho
arXiv · arXiv q-fin · 2026
This study develops and evaluates a deep reinforcement learning framework for dynamic portfolio allocation across global equity markets. The Soft Actor-Critic algorithm is used to learn continuous portfolio weights within a Markov Decision Process, incorporating transaction costs, turnover penalties, and diversification constraints into the reward function. Five model configurations are compared, varying in reward fo…
Kamil Kashif, Robert Ślepaczuk
arXiv · arXiv · 2026
Partially convertible economies face a market-design problem: trade integration, cross-border investment, and domestic balance-sheet exposure increase the demand for currency hedging before full financial integration is complete. China adopted a distinctive architecture for this problem by fostering a deliverable offshore Renminbi market (CNH) alongside the segmented onshore market (CNY), rather than relying only on …
Samuel Drapeau, Peng Luo, Xuan Tao, Tan Wang
arXiv · arXiv · 2025
In April 2020, the Chicago Mercantile Exchange temporarily switched the pricing formula for West Texas Intermediate oil market options from the Black model to the Bachelier model. In this context, we introduce an additive Bachelier model that provides a simple closed-form solution and a good description of the implied volatility surface. This new additive model exhibits several notable mathematical and financial prop…
Roberto Baviera, Michele Domenico Massaria
arXiv · arXiv · 2009
It is commonly accepted that Commodities futures and forward prices, in principle, agree under some simplifying assumptions. One of the most relevant assumptions is the absence of counterparty risk. Indeed, due to margining, futures have practically no counterparty risk. Forwards, instead, may bear the full risk of default for the counterparty when traded with brokers or outside clearing houses, or when embedded in o…
Damiano Brigo, Kyriakos Chourdakis, Imane Bakkar
arXiv · arXiv q-fin · 2025
Financial markets exhibit an apparent paradox: while directional price movements remain largely unpredictable--consistent with weak-form efficiency--the magnitude of price changes displays systematic structure. Here we demonstrate that real-time order-flow entropy, computed from a 15-state Markov transition matrix at second resolution, predicts the magnitude of intraday returns without providing directional informati…
Mainak Singha
arXiv · arXiv q-fin · 2026
Forward-looking volatility forecasts are central inputs to derivatives pricing, market making, risk management, and volatility-linked trading strategies, with ARCH and GARCH models serving as the canonical workhorses. Such models are natural in standard asset markets, where prices are positive-valued stochastic processes and volatility is typically inferred from return dynamics. Prediction markets have a different st…
Weiye Xi, Ciamac C. Moallemi, Mallesh Pai, Shouqiao Wang
arXiv · arXiv q-fin · 2026
This study investigates whether regime-dependent volatility forecasting and machine-learning-based return prediction can be jointly integrated to improve both statistical forecasting performance and economic strategy outcomes in equity markets. Using high-frequency CSI 300 Index data from 2005 to 2023, a sequential twostage framework is developed. In the first stage, realized volatility is modeled using regime-augmen…
Xinyue Fang, Robert Ślepaczuk
arXiv · arXiv q-fin · 2025
In the complex landscape of traditional futures trading, where vast data and variables like real-time Limit Order Books (LOB) complicate price predictions, we introduce the FutureQuant Transformer model, leveraging attention mechanisms to navigate these challenges. Unlike conventional models focused on point predictions, the FutureQuant model excels in forecasting the range and volatility of future prices, thus offer…
Wenhao Guo, Yuda Wang, Zeqiao Huang, Changjiang Zhang, Shumin ma
arXiv · arXiv q-fin · 2018
Models which postulate lognormal dynamics for interest rates which are compounded according to market conventions, such as forward LIBOR or forward swap rates, can be constructed initially in a discrete tenor framework. Interpolating interest rates between maturities in the discrete tenor structure is equivalent to extending the model to continuous tenor. The present paper sets forth an alternative way of performing …
Erik Schlögl
arXiv · arXiv q-fin · 2017
On a daily investment decision in a security market, the price earnings (PE) ratio is one of the most widely applied methods being used as a firm valuation tool by investment experts. Unfortunately, recent academic developments in financial econometrics and machine learning rarely look at this tool. In practice, fundamental PE ratios are often estimated only by subjective expert opinions. The purpose of this research…
Haizhen Wang, Ratthachat Chatpatanasiri, Pairote Sattayatham
arXiv · arXiv q-fin · 2015
We analyze a negative-parameter variant of the diversity-weighted portfolio studied by Fernholz, Karatzas, and Kardaras (Finance Stoch 9(1):1-27, 2005), which invests in each company a fraction of wealth inversely proportional to the company's market weight (the ratio of its capitalization to that of the entire market). We show that this strategy outperforms the market with probability one, under a non-degeneracy ass…
Alexander Vervuurt, Ioannis Karatzas
arXiv · arXiv q-fin · 2011
We consider a structural credit model for a large portfolio of credit risky assets where the correlation is due to a market factor. By considering the large portfolio limit of this system we show the existence of a density process for the asset values. This density evolves according to a stochastic partial differential equation and we establish existence and uniqueness for the solution taking values in a suitable fun…
Nick Bush, Ben M. Hambly, Helen Haworth, Lei Jin, Christoph Reisinger