arXiv · arXiv · 2012
We propose a unified structural credit risk model incorporating both insolvency and illiquidity risks, in order to investigate how a firm's default probability depends on the liquidity risk associated with its financing structure. We assume the firm finances its risky assets by mainly issuing short- and long-term debt. Short-term debt can have either a discrete or a more realistic staggered tenor structure. At rollov…
Gechun Liang, Eva Lütkebohmert, Wei Wei
arXiv · arXiv · 2025
We study the problem of optimal liquidity withdrawal for a representative liquidity provider (LP) in an automated market maker (AMM). LPs earn fees from trading activity but are exposed to impermanent loss (IL) due to price fluctuations. While existing work has focused on static provision and exogenous exit strategies, we characterise the optimal exit time as the solution to a stochastic control problem with an endog…
Philippe Bergault, Sébastien Bieber, Leandro Sánchez-Betancourt
arXiv · arXiv · 2023
The primary objective of this paper is to conceive and develop a new methodology to detect notable changes in liquidity within an order-driven market. We study a market liquidity model which allows us to dynamically quantify the level of liquidity of a traded asset using its limit order book data. The proposed metric holds potential for enhancing the aggressiveness of optimal execution algorithms, minimizing market i…
Etienne Chevalier, Yadh Hafsi, Vathana Ly Vath
arXiv · arXiv · 2022
We study the formation of an optimal interbank network in a model where banks control both their supply of liquidity, through cash reserves, and their exposures to other banks' risky projects. The value of each bank's project may suddenly decline depending on their cash reserves and both the occurence and magnitude of liquidity shocks. In two distinct settings, we solve the system-wide optimal control problem and obt…
Daniel E. Rigobon, Ronnie Sircar
arXiv · arXiv · 2021
This paper investigates the callable convertible bond problem in the presence of a liquidity constraint modelled by Poisson signals. We assume that neither the bondholder nor the firm has absolute priority when they stop the game simultaneously, but instead, a proportion $m\in[0,1]$ of the bond is converted to the firm's stock and the rest is called by the firm. The paper thus generalizes the special case studied in …
David Hobson, Gechun Liang, Edward Wang
arXiv · arXiv · 2019
This paper discusses the valuation of credit default swaps, where default is announced when the reference asset price has gone below certain level from the last record maximum, also known as the high-water mark or drawdown. We assume that the protection buyer pays premium at fixed rate when the asset price is above a pre-specified level and continuously pays whenever the price increases. This payment scheme is in fav…
Zbigniew Palmowski, Budhi Surya
arXiv · arXiv · 2017
We present a version of the fundamental theorem of asset pricing (FTAP) for continuous time large financial markets with two filtrations in an $L^p$-setting for $ 1 \leq p < \infty$. This extends the results of Yuri Kabanov and Christophe Stricker \cite{KS:06} to continuous time and to a large financial market setting, however, still preserving the simplicity of the discrete time setting. On the other hand it general…
Christa Cuchiero, Irene Klein, Josef Teichmann
arXiv · arXiv · 2015
In this article, we present a discrete time modeling framework, in which the shape and dynamics of a Limit Order Book (LOB) arise endogenously from an equilibrium between multiple market participants (agents). We use the proposed modeling framework to analyze the effects of trading frequency on market liquidity in a very general setting. In particular, we demonstrate the dual effect of high trading frequency. On the …
Roman Gayduk, Sergey Nadtochiy
arXiv · arXiv · 2012
We introduce a trade strategy representation theorem for performance measurement and portable alpha in high frequency trading, by embedding a robust trading algorithm that describe portfolio manager market timing behavior, in a canonical multifactor asset pricing model. First, we present a spectral test for market timing based on behavioral transformation of the hedge factors design matrix. Second, we find that the t…
Godfrey Charles-Cadogan
arXiv · arXiv · 2026
We calibrate credit default swaps and index tranches with elastically stopped Lévy processes: each firm defaults when the running supremum of a latent, spectrally positive distress process crosses an independent exponential barrier. This yields a Cox construction with totally inaccessible default times, while retaining the interpretability and explicit formulas of a structural approach. Adding a single common compoun…
Graeme Baker, Agostino Capponi
arXiv · arXiv · 2026
A physically backed leveraged event position requires real credit: if collateral C receives leverage L, the protocol supplies (L-1)C and uses the combined amount to acquire recognized event exposure. This paper develops a venue-agnostic on-chain credit architecture for that capital layer and an endogenous model of its capital market. It separates traders, Senior Credit LPs, market makers, liquidators, and Liquidation…
Maksym Nechepurenko
arXiv · arXiv · 2012
We derive explicit recursive formulas for Target Close (TC) and Implementation Shortfall (IS) in the Almgren-Chriss framework. We explain how to compute the optimal starting and stopping times for IS and TC, respectively, given a minimum trading size. We also show how to add a minimum participation rate constraint (Percentage of Volume, PVol) for both TC and IS. We also study an alternative set of risk measures for t…
Mauricio Labadie, Charles-Albert Lehalle
arXiv · arXiv · 2026
We study seven major crypto-perpetual liquidation cascades (2022-2025), and in the largest of them we can watch the mechanism directly. From the on-chain fill log of a fully transparent venue we measure the branching ratio of that event -- the October 2025 crash, the largest on record -- in flight, with both of its factors observed and no free constants. It ran deeply subcritical: the structural ratio and the amplifi…
Ramon Marc Garcia Seuma
arXiv · arXiv · 2026
This paper proposes a simple and parsimonious discrete-time simulation model to describe the endogenous formation and periodic collapse of financial bubbles. While existing literature has extensively explored the statistical properties of locally explosive bubble dynamics, capturing the micro-level interplay of investor herd behavior and panic selling within a unified framework remains a challenge. Our model addresse…
Naohiro Yoshida
arXiv · arXiv · 2025
We present a reinforcement-learning (RL) framework for dynamic hedging of equity index option exposures under realistic transaction costs and position limits. We hedge a normalized option-implied equity exposure (one unit of underlying delta, offset via SPY) by trading the underlying index ETF, using the option surface and macro variables only as state information and not as a direct pricing engine. Building on the "…
Travon Lucius, Christian Koch, Jacob Starling, Julia Zhu, Miguel Urena
arXiv · arXiv · 2025
This paper analyzes the intersection of presidential authority and cryptocurrency markets during Donald J. Trump's second term (2025-2029). We examine developments from 2024 through October 2025, focusing on how executive influence, family business ventures, and digital assets became intertwined in ways that blurred boundaries between public office and private profit. Using a mixed-methods approach that combines quan…
Habib Badawi
arXiv · arXiv · 2025
Stablecoins have emerged as a significant component of global financial infrastructure, with aggregate market capitalization surpassing USD250 billion in 2025. Their increasing integration into payment and settlement systems has simultaneously introduced novel channels of systemic exposure, particularly liquidity risk during periods of market stress. This study develops a hybrid monetary architecture that embeds fiat…
Hongzhe Wen, R. S. M. Lau
arXiv · arXiv · 2025
High-frequency trading (HFT) is an investing strategy that continuously monitors market states and places bid and ask orders at millisecond speeds. Traditional HFT approaches fit models with historical data and assume that future market states follow similar patterns. This limits the effectiveness of any single model to the specific conditions it was trained for. Additionally, these models achieve optimal solutions o…
Yang Li, Zhi Chen, Steve Yang