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This paper proposes and motivates a dynamical model of the Chinese stock market based on a linear regression in a dual state space connected to the original state space of correlations between the volume-at-price buckets by a Fourier transform. We apply our model to the price migration of executed orders by the Chinese brokerages in 2009-2010. Regulatory brokerage tapes were used to conduct a natural experiment assum…
In this paper we develop a new form of agent-based model for limit order books based on heterogeneous trading agents, whose motivations are liquidity driven. These agents are abstractions of real market participants, expressed in a stochastic model framework. We develop an efficient way to perform statistical calibration of the model parameters on Level 2 limit order book data from Chi-X, based on a combination of in…
In this article, we develop a model for the evolution of real estate prices. A wide range of inputs, including stochastic interest rates and changing demands for the asset, are considered. Maximizing their expected utility, home owners make optimal sale decisions given these changing market conditions. Using these optimal sale decisions, we simulate the implied evolution of housing prices providing insights into the …
In a financial exchange, market impact is a measure of the price change of an asset following a transaction. This is an important element of market microstructure, which determines the behaviour of the market following a trade. In this paper, we first provide a discussion on the market impact observed in the BTC/USD Futures market, then we present a novel multi-agent market simulation that can follow an underlying pr…
Inventory matching is a standard mechanism/auction for trading financial stocks by which buyers and sellers can be paired. In the financial world, banks often undertake the task of finding such matches between their clients. The related stocks can be traded without adversely impacting the market price for either client. If matches between clients are found, the bank can offer the trade at advantageous rates. If no ma…
This paper constructs optimal brokerage contracts for multiple (heterogeneous) clients trading a single asset whose price follows the Almgren-Chriss model. The distinctive features of this work are as follows: (i) the reservation values of the clients are determined endogenously, and (ii) the broker is allowed to not offer a contract to some of the potential clients, thus choosing her portfolio of clients strategical…
We discuss and extend a powerful, geometric framework to represent the set of portfolios, which identifies the space of asset allocations with the points lying in a convex polytope. Based on this viewpoint, we survey certain state-of-the-art tools from geometric and statistical computing in order to handle important and difficult problems in digital finance. Although our tools are quite general, in this paper we focu…
The role of credit rating agencies has been under severe scrutiny after the subprime crisis. In this paper we explore the relationship between credit ratings and informational efficiency of a sample of thirty nine corporate bonds of US oil and energy companies from April 2008 to November 2012. For that purpose, we use a powerful statistical tool relatively new in the financial literature: the complexity-entropy causa…
In this work we consider three problems of the standard market approach to pricing of credit index options: the definition of the index spread is not valid in general, the usually considered payoff leads to a pricing which is not always defined, and the candidate numeraire one would use to define a pricing measure is not strictly positive, which would lead to a non-equivalent pricing measure. We give a general mathem…