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4,400 | The Minimal Model of Financial Complexity | q-fin.TR | A representative investor generates realistic and complex security price
paths by following this trading strategy: if, a few ticks ago, the market asset
had two consecutive upticks or two consecutive downticks, then sell, and
otherwise buy. This simple, unique, and robust model is the smallest possible
deterministic mo... | finance |
4,401 | Emergence of Power Law in a Market with Mixed Models | q-fin.TR | We investigate the problem of wealth distribution from the viewpoint of asset
exchange. Robust nature of Pareto's law across economies, ideologies and
nations suggests that this could be an outcome of trading strategies. However,
the simple asset exchange models fail to reproduce this feature. A yardsale(YS)
model in w... | finance |
4,402 | Effects of introduction of new resources and fragmentation of existing resources on limiting wealth distribution in asset exchange models | q-fin.TR | Pareto law, which states that wealth distribution in societies have a
power-law tail, has been a subject of intensive investigations in statistical
physics community. Several models have been employed to explain this behavior.
However, most of the agent based models assume the conservation of number of
agents and wealt... | finance |
4,403 | A Unified Framework for Dynamic Pari-Mutuel Information Market Design | q-fin.TR | Recently, several new pari-mutuel mechanisms have been introduced to organize
markets for contingent claims. Hanson introduced a market maker derived from
the logarithmic scoring rule, and later Chen and Pennock developed a cost
function formulation for the market maker. On the other hand, the SCPM model of
Peters et a... | finance |
4,404 | Optimal Trade Execution in Illiquid Markets | q-fin.TR | We study optimal trade execution strategies in financial markets with
discrete order flow. The agent has a finite liquidation horizon and must
minimize price impact given a random number of incoming trade counterparties.
Assuming that the order flow $N$ is given by a Poisson process, we give a full
analysis of the prop... | finance |
4,405 | Scale Invariance, Bounded Rationality and Non-Equilibrium Economics | q-fin.TR | We study a class of heterogeneous agent-based models which are based on a
basic set of principles, and the most fundamental operations of an economic
system: trade and product transformations.
A basic guiding principle is scale invariance, which means that the dynamics
of the economy should not depend on the units us... | finance |
4,406 | Liquidity Crisis, Granularity of the Order Book and Price Fluctuations | q-fin.TR | We introduce a microscopic model for the dynamics of the order book to study
how the lack of liquidity influences price fluctuations. We use the average
density of the stored orders (granularity $g$) as a proxy for liquidity. This
leads to a Price Impact Surface which depends on both volume $\omega$ and $g$.
The depend... | finance |
4,407 | Perturbation theory in a pure exchange non-equilibrium economy | q-fin.TR | We develop a formalism to study linearized perturbations around the
equilibria of a pure exchange economy. With the use of mean field theory
techniques, we derive equations for the flow of products in an economy driven
by heterogeneous preferences and probabilistic interaction between agents. We
are able to show that i... | finance |
4,408 | Stock markets and quantum dynamics: a second quantized description | q-fin.TR | In this paper we continue our descriptions of stock markets in terms of some
non abelian operators which are used to describe the portfolio of the various
traders and other {\em observable} quantities. After a first prototype model
with only two traders, we discuss a more realistic model of market with an
arbitrary num... | finance |
4,409 | Simplified stock markets described by number operators | q-fin.TR | In this paper we continue our systematic analysis of the operatorial approach
previously proposed in an economical context and we discuss a {\em mixed} toy
model of a simplified stock market, i.e. a model in which the price of the
shares is given as an input. We deduce the time evolution of the portfolio of
the various... | finance |
4,410 | Emergence of Price Divergence in a Model Short-Term Electric Power Market | q-fin.TR | A minimal model of a market of myopic non-cooperative agents who trade
bilaterally with random bids reproduces qualitative features of short-term
electric power markets, such as those in California and New England. Each agent
knows its own budget and preferences but not those of any other agent. The
near-equilibrium pr... | finance |
4,411 | Housing Market Microstructure | q-fin.TR | 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 opti... | finance |
4,412 | A queueing theory description of fat-tailed price returns in imperfect financial markets | q-fin.TR | In a financial market, for agents with long investment horizons or at times
of severe market stress, it is often changes in the asset price that act as the
trigger for transactions or shifts in investment position. This suggests the
use of price thresholds to simulate agent behavior over much longer timescales
than are... | finance |
4,413 | The scale of market quakes | q-fin.TR | We define a methodology to quantify market activity on a 24 hour basis by
defining a scale, the so-called scale of market quakes (SMQ). The SMQ is
designed within a framework where we analyse the dynamics of excess price moves
from one directional change of price to the next. We use the SMQ to quantify
the FX market an... | finance |
4,414 | Sensitivity of the Performance of a Simple Exchange Model to its Topology | q-fin.TR | We study a simple exchange model in which price is fixed and the amount of a
good transferred between actors depends only on the actors' respective budgets
and the existence of a link between transacting actors. The model induces a
simply-connected but possibly multi-component bipartite graph. A trading
session on a fi... | finance |
4,415 | Outsider Trading | q-fin.TR | In this paper we examine inefficiencies and information disparity in the
Japanese stock market. By carefully analysing information publicly available on
the internet, an `outsider' to conventional statistical arbitrage
strategies--which are based on market microstructure, company releases, or
analyst reports--can never... | finance |
4,416 | Statistical identification with hidden Markov models of large order splitting strategies in an equity market | q-fin.TR | Large trades in a financial market are usually split into smaller parts and
traded incrementally over extended periods of time. We address these large
trades as hidden orders. In order to identify and characterize hidden orders we
fit hidden Markov models to the time series of the sign of the tick by tick
inventory var... | finance |
4,417 | "Market making" behaviour in an order book model and its impact on the bid-ask spread | q-fin.TR | It has been suggested that marked point processes might be good candidates
for the modelling of financial high-frequency data. A special class of point
processes, Hawkes processes, has been the subject of various investigations in
the financial community. In this paper, we propose to enhance a basic
zero-intelligence o... | finance |
4,418 | Intraday Patterns in the Cross-section of Stock Returns | q-fin.TR | Motivated by the literature on investment flows and optimal trading, we
examine intraday predictability in the cross-section of stock returns. We find
a striking pattern of return continuation at half-hour intervals that are exact
multiples of a trading day, and this effect lasts for at least 40 trading days.
Volume, o... | finance |
4,419 | Modelling savings behavior of agents in the kinetic exchange models of market | q-fin.TR | Kinetic exchange models have been successful in explaining the shape of the
income/wealth distribution in the economies. However, such models usually make
some ad-hoc assumptions when it comes to determining the savings factor. Here,
we examine a few models in and out of the domain of standard neo-classical
economics t... | finance |
4,420 | Optimizing a basket against the efficient market hypothesis | q-fin.TR | The possibility that the collective dynamics of a set of stocks could lead to
a specific basket violating the efficient market hypothesis is investigated.
Precisely, we show that it is systematically possible to form a basket with a
non-trivial autocorrelation structure when the examined time scales are at the
order of... | finance |
4,421 | Automated Liquidity Provision and the Demise of Traditional Market Making | q-fin.TR | Traditional market makers are losing their importance as automated systems
have largely assumed the role of liquidity provision in markets. We update the
model of Glosten and Milgrom (1985) to analyze this new world: we add multiple
securities and introduce an automated market maker who uses the relationships
between s... | finance |
4,422 | Convergence of Income Growth Rates in Evolutionary Agent-Based Economics | q-fin.TR | We consider a heterogeneous agent-based economic model where economic agents
have strictly bounded rationality and where income allocation strategies evolve
through selective imitation. Income is calculated by a Cobb-Douglas type
production function, and selection of strategies for imitation depends on the
income growt... | finance |
4,423 | Financial correlations at ultra-high frequency: theoretical models and empirical estimation | q-fin.TR | A detailed analysis of correlation between stock returns at high frequency is
compared with simple models of random walks. We focus in particular on the
dependence of correlations on time scales - the so-called Epps effect. This
provides a characterization of stochastic models of stock price returns which
is appropriat... | finance |
4,424 | Insider Trading in the Market with Rational Expected Price | q-fin.TR | Kyle (1985) builds a pioneering and influential model, in which an insider
with long-lived private information submits an optimal order in each period
given the market maker's pricing rule. An inconsistency exists to some extent
in the sense that the ``constant pricing rule " actually assumes an adaptive
expected price... | finance |
4,425 | Trading activity and price impact in parallel markets: SETS vs. off-book market at the London Stock Exchange | q-fin.TR | We empirically study the trading activity in the electronic on-book segment
and in the dealership off-book segment of the London Stock Exchange,
investigating separately the trading of active market members and of other
market participants which are non-members. We find that (i) the volume
distribution of off-book tran... | finance |
4,426 | Inside Trading, Public Disclosure and Imperfect Competition | q-fin.TR | In this paper, we present a multi-period trading model in the style of Kyle
(1985)'s inside trading model, by assuming that there are at least two insiders
in the market with long-lived private information, under the requirement that
each insider publicly discloses his stock trades after the fact. Based on this
model, ... | finance |
4,427 | Analysis of trade packages in Chinese stock market | q-fin.TR | This paper conducts an empirically study on the trade package composed of a
sequence of consecutive purchases or sales of 23 stocks in Chinese stock
market. We investigate the probability distributions of the execution time, the
number of trades and the total trading volume of trade packages, and analyze
the possible s... | finance |
4,428 | The slippage paradox | q-fin.TR | Buying or selling assets leads to transaction costs for the investor. On one
hand, it is well know to all market practionaires that the transaction costs
are positive on average and present therefore systematic loss. On the other
hand, for every trade, there is a buy side and a sell side, the total amount of
asset and ... | finance |
4,429 | Pollution permits, Strategic Trading and Dynamic Technology Adoption | q-fin.TR | This paper analyzes the dynamic incentives for technology adoption under a
transferable permits system, which allows for strategic trading on the permit
market. Initially, firms can invest both in low-emitting production
technologies and trade permits. In the model, technology adoption and allowance
price are generated... | finance |
4,430 | Impact of heterogenous prior beliefs and disclosed insider trades | q-fin.TR | In this paper, we present a multi-period trading model by assuming that
traders face not only asymmetric information but also heterogenous prior
beliefs, under the requirement that the insider publicly disclose his stock
trades after the fact. We show that there is an equilibrium in which the
irrational insider camoufl... | finance |
4,431 | Dealing with the Inventory Risk. A solution to the market making problem | q-fin.TR | Market makers continuously set bid and ask quotes for the stocks they have
under consideration. Hence they face a complex optimization problem in which
their return, based on the bid-ask spread they quote and the frequency at which
they indeed provide liquidity, is challenged by the price risk they bear due to
their in... | finance |
4,432 | Adding to the Regulator's Toolbox: Integration and Extension of Two Leading Market Models | q-fin.TR | As demonstrated during the recent financial crisis, regulators require
additional analytical tools to assess systemic risk in the financial sector.
This paper describes one such tool; namely a novel market modeling and analysis
capability. Our model builds upon two leading market models: one which
emphasizes market mic... | finance |
4,433 | Efficiency and Equilibria in Games of Optimal Derivative Design | q-fin.TR | In this paper the problem of optimal derivative design, profit maximization
and risk minimization under adverse selection when multiple agencies compete
for the business of a continuum of heterogenous agents is studied. The presence
of ties in the agents' best-response correspondences yields discontinuous
payoff functi... | finance |
4,434 | Price impact asymmetry of institutional trading in Chinese stock market | q-fin.TR | The asymmetric price impact between the institutional purchases and sales of
32 liquid stocks in Chinese stock markets in year 2003 is carefully studied. We
analyze the price impact in both drawup and drawdown trends with consecutive
positive and negative daily price changes, and test the dependence of the price
impact... | finance |
4,435 | A limit order book model for latency arbitrage | q-fin.TR | We consider a single security market based on a limit order book and two
investors, with different speeds of trade execution. If the fast investor can
front-run the slower investor, we show that this allows the fast trader to
obtain risk free profits, but that these profits cannot be scaled. We derive
the fast trader's... | finance |
4,436 | High Frequency Lead/lag Relationships - Empirical facts | q-fin.TR | Lead/lag relationships are an important stylized fact at high frequency. Some
assets follow the path of others with a small time lag. We provide indicators
to measure this phenomenon using tick-by-tick data. Strongly asymmetric
cross-correlation functions are empirically observed, especially in the
future/stock case. W... | finance |
4,437 | Semiclosed Pricing Mechanism | q-fin.TR | This paper aims at designing the different important components of a
semi-closed simulated stock market (pricing mechanism, stock allocation and
news generation). The purpose is to understand the interactions of the
different aspects within a 'semi-closed' system. The complexity and nature of
the system led to the proc... | finance |
4,438 | Price Jump Prediction in Limit Order Book | q-fin.TR | A limit order book provides information on available limit order prices and
their volumes. Based on these quantities, we give an empirical result on the
relationship between the bid-ask liquidity balance and trade sign and we show
that liquidity balance on best bid/best ask is quite informative for predicting
the futur... | finance |
4,439 | Patience vs. Impatience of Stock Traders | q-fin.TR | An ability to postpone one's execution without penalty provides an important
strategic advantage in high-frequency trading. To elucidate competition between
traders one has to formulate to a quantitative theory of formation of the
execution price from market expectations and quotes. This theory was provided
in 2005 by ... | finance |
4,440 | Optimal multifactor trading under proportional transaction costs | q-fin.TR | Proportional transaction costs present difficult theoretical problems in
trading algorithm design, on account of their lack of analytical tractability.
The author derives a solution of DT-NT-DT form for an arbitrary model in which
the the traded asset has diffusive dynamics described by one or more stochastic
risk fact... | finance |
4,441 | Super-exponential bubbles in lab experiments: evidence for anchoring over-optimistic expectations on price | q-fin.TR | We analyze a controlled price formation experiment in the laboratory that
shows evidence for bubbles. We calibrate two models that demonstrate with high
statistical significance that these laboratory bubbles have a tendency to grow
faster than exponential due to positive feedback. We show that the positive
feedback ope... | finance |
4,442 | Optimal High Frequency Trading in a Pro-Rata Microstructure with Predictive Information | q-fin.TR | We propose a framework to study optimal trading policies in a one-tick
pro-rata limit order book, as typically arises in short-term interest rate
futures contracts. The high-frequency trader has the choice to trade via market
orders or limit orders, which are represented respectively by impulse controls
and regular con... | finance |
4,443 | Optimal starting times, stopping times and risk measures for algorithmic trading: Target Close and Implementation Shortfall | q-fin.TR | 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 (Per... | finance |
4,444 | Price manipulation in a market impact model with dark pool | q-fin.TR | For a market impact model, price manipulation and related notions play a role
that is similar to the role of arbitrage in a derivatives pricing model. Here,
we give a systematic investigation into such regularity issues when orders can
be executed both at a traditional exchange and in a dark pool. To this end, we
focus... | finance |
4,445 | Large tick assets: implicit spread and optimal tick size | q-fin.TR | In this work, we provide a framework linking microstructural properties of an
asset to the tick value of the exchange. In particular, we bring to light a
quantity, referred to as implicit spread, playing the role of spread for large
tick assets, for which the effective spread is almost always equal to one tick.
The rel... | finance |
4,446 | Adaptive Execution: Exploration and Learning of Price Impact | q-fin.TR | We consider a model in which a trader aims to maximize expected risk-adjusted
profit while trading a single security. In our model, each price change is a
linear combination of observed factors, impact resulting from the trader's
current and prior activity, and unpredictable random effects. The trader must
learn coeffi... | finance |
4,447 | The Transition from Brownian Motion to Boom-and-Bust Dynamics in Financial and Economic Systems | q-fin.TR | Quasi-equilibrium models for aggregate variables are widely-used throughout
finance and economics. The validity of such models depends crucially upon
assuming that the systems' participants behave both independently and in a
Markovian fashion.
We present a simplified market model to demonstrate that herding effects
b... | finance |
4,448 | Price-Setting of Market Makers: A Filtering Problem with an Endogenous Filtration | q-fin.TR | We study the price-setting problem of market makers under risk neutrality and
perfect competition in continuous time. Thereby we follow the classic
Glosten-Milgrom model that defines bid and ask prices as expectations of a true
value of the asset given the market makers' partial information that includes
the customers ... | finance |
4,449 | High Frequency Market Making | q-fin.TR | Since they were authorized by the U.S. Security and Exchange Commission in
1998, electronic exchanges have boomed, and by 2010 high frequency trading
accounted for over 70% of equity trades in the US. Such markets are thought to
increase liquidity because of the presence of market makers, who are willing to
trade as co... | finance |
4,450 | Optimal execution and block trade pricing: a general framework | q-fin.TR | In this article, we develop a general framework to study optimal execution
and to price block trades. We prove existence of optimal liquidation strategies
and we provide regularity results for optimal strategies under very general
hypotheses. We exhibit a Hamiltonian characterization for the optimal strategy
that can b... | finance |
4,451 | A Model of Market Limit Orders By Stochastic PDE's, Parameter Estimation, and Investment Optimization | q-fin.TR | In this paper we introduce a completely continuous and time-variate model of
the evolution of market limit orders based on the existence, uniqueness, and
regularity of the solutions to a type of stochastic partial differential
equations obtained in Zheng and Sowers (2012). In contrary to several models
proposed and res... | finance |
4,452 | Market Liquidity and Convexity of Order Book (Evidence From China) | q-fin.TR | Market liquidity plays a vital role in the field of market micro-structure,
because it is the vigor of the financial market. This paper uses a variable
called convexity to measure the potential liquidity provided by order-book.
Based on the high-frequency data of each stock included in the SSE (Shanghai
Stock Exchange)... | finance |
4,453 | Les réservations et les suspensions de cotation sont-elles un frein à l'efficience informationnelle des marchés ? | q-fin.TR | The use of the trading halts is a practice common to all markets. However,
the advantages and the disadvantages of the measurements are regularly
discussed. The partisans think that the trading suspensions or the price limits
make it possible to the investors to have time to react to the new information.
The detractors... | finance |
4,454 | Market Impact with Autocorrelated Order Flow under Perfect Competition | q-fin.TR | Our goal in this paper is to study the market impact in a market in which the
order flow is autocorrelated. We build a model which explains qualitatively and
quantitatively the empirical facts observed so far concerning market impact. We
define different notions of market impact, and show how they lead to the
different... | finance |
4,455 | Trust in foreseeing neighbours - a novel threshold model of financial market | q-fin.TR | The three-state agent-based 2D model of financial markets in the version
proposed by Giulia Iori in 2002 has been herein extended. We have introduced
the increase of herding behaviour by modelling the altering trust of an agent
in his nearest neighbours. The trust increases if the neighbour has foreseen
the price chang... | finance |
4,456 | Information Transmission Between Financial Markets in Chicago and New York | q-fin.TR | High frequency trading has led to widespread efforts to reduce information
propagation delays between physically distant exchanges. Using relativistically
correct millisecond-resolution tick data, we document a 3-millisecond decrease
in one-way communication time between the Chicago and New York areas that has
occurred... | finance |
4,457 | Dynamical Trading Mechanism in Limit Order Markets | q-fin.TR | This work's purpose is to understand the dynamics of limit order books in
order-driven markets. We try to illustrate a dynamical trading mechanism
attached to the microstructure of limit order markets. We capture the iterative
nature of trading processes, which is critical in the dynamics of bid-ask pairs
and the switc... | finance |
4,458 | High-frequency market-making for multi-dimensional Markov processes | q-fin.TR | In this paper we complete and extend our previous work on stochastic control
applied to high frequency market-making with inventory constraints and
directional bets. Our new model admits several state variables (e.g. market
spread, stochastic volatility and intensities of market orders) provided the
full system is Mark... | finance |
4,459 | Permanent market impact can be nonlinear | q-fin.TR | There are two schools of thought regarding market impact modeling. On the one
hand, seminal papers by Almgren and Chriss introduced a decomposition between a
permanent market impact and a temporary (or instantaneous) market impact. This
decomposition is used by most practitioners in execution models. On the other
hand,... | finance |
4,460 | A market impact game under transient price impact | q-fin.TR | We consider a Nash equilibrium between two high-frequency traders in a simple
market impact model with transient price impact and additional quadratic
transaction costs. Extending a result by Sch\"oneborn (2008), we prove
existence and uniqueness of the Nash equilibrium and show that for small
transaction costs the hig... | finance |
4,461 | A theoretical framework for trading experiments | q-fin.TR | A general framework is suggested to describe human decision making in a
certain class of experiments performed in a trading laboratory. We are in
particular interested in discerning between two different moods, or states of
the investors, corresponding to investors using fundamental investment
strategies, technical ana... | finance |
4,462 | VWAP execution and guaranteed VWAP | q-fin.TR | Optimal liquidation using VWAP strategies has been considered in the
literature, though never in the presence of permanent market impact and only
rarely with execution costs. Moreover, only VWAP strategies have been studied
and the pricing of guaranteed VWAP contracts has never been addressed. In this
article, we devel... | finance |
4,463 | Futures market efficiency diagnostics via temporal two-point correlations. Russian market case study | q-fin.TR | Using a two-point correlation technique, we study emergence of market
efficiency in the emergent Russian futures market by focusing on lagged
correlations. The correlation strength of leader-follower effects in the lagged
inter-market correlations on the hourly time frame is seen to be significant
initially (2009-2011)... | finance |
4,464 | Characterizing financial crisis by means of the three states random field Ising model | q-fin.TR | We propose a formula of time-series prediction by means of three states
random field Ising model (RFIM). At the economic crisis due to disasters or
international disputes, the stock price suddenly drops. The macroscopic
phenomena should be explained from the corresponding microscopic view point
because there are existi... | finance |
4,465 | A Pre-Trade Algorithmic Trading Model under Given Volume Measures and Generic Price Dynamics (GVM-GPD) | q-fin.TR | We make several improvements to the mean-variance framework for optimal
pre-trade algorithmic execution, by working with volume measures and generic
price dynamics. Volume measures are the continuum analogies for discrete volume
profiles commonly implemented in the execution industry. Execution then becomes
an absolute... | finance |
4,466 | Agent-Based Stock Market Model with Endogenous Agents' Impact | q-fin.TR | The three-state agent-based 2D model of financial markets as proposed by
Giulia Iori has been extended by introducing increasing trust in the correctly
predicting agents, a more realistic consultation procedure as well as a formal
validation mechanism. This paper shows that such a model correctly reproduces
the three f... | finance |
4,467 | Optimal Order Scheduling for Deterministic Liquidity Patterns | q-fin.TR | We consider a broker who has to place a large order which consumes a sizable
part of average daily trading volume. The broker's aim is thus to minimize
execution costs he incurs from the adverse impact of his trades on market
prices. By contrast to the previous literature, see, e.g., Obizhaeva and Wang
(2005), Predoiu,... | finance |
4,468 | Modeling the coupled return-spread high frequency dynamics of large tick assets | q-fin.TR | Large tick assets, i.e. assets where one tick movement is a significant
fraction of the price and bid-ask spread is almost always equal to one tick,
display a dynamics in which price changes and spread are strongly coupled. We
introduce a Markov-switching modeling approach for price change, where the
latent Markov proc... | finance |
4,469 | Nash equilibrium for coupling of CO2 allowances and electricity markets | q-fin.TR | In this note, we present an existence result of a Nash equilibrium between
electricity producers selling their production on an electricity market and
buying CO2 emission allowances on an auction carbon market. The producers'
strategies integrate the coupling of the two markets via the cost functions of
the electricity... | finance |
4,470 | Impact of information cost and switching of trading strategies in an artificial stock market | q-fin.TR | This paper studies the switching of trading strategies and its effect on the
market volatility in a continuous double auction market. We describe the
behavior when some uninformed agents, who we call switchers, decide whether or
not to pay for information before they trade. By paying for the information
they behave as ... | finance |
4,471 | Option pricing and hedging with execution costs and market impact | q-fin.TR | This article considers the pricing and hedging of a call option when
liquidity matters, that is, either for a large nominal or for an illiquid
underlying asset. In practice, as opposed to the classical assumptions of a
price-taking agent in a frictionless market, traders cannot be perfectly hedged
because of execution ... | finance |
4,472 | Trade arrival dynamics and quote imbalance in a limit order book | q-fin.TR | We examine the dynamics of the bid and ask queues of a limit order book and
their relationship with the intensity of trade arrivals. In particular, we
study the probability of price movements and trade arrivals as a function of
the quote imbalance at the top of the limit order book. We propose a stochastic
model in an ... | finance |
4,473 | The Self-Financing Equation in High Frequency Markets | q-fin.TR | High Frequency Trading (HFT) represents an ever growing proportion of all
financial transactions as most markets have now switched to electronic order
book systems. The main goal of the paper is to propose continuous time
equations which generalize the self-financing relationships of frictionless
markets to electronic ... | finance |
4,474 | Coupled mode theory of stock price formation | q-fin.TR | We develop a theory of bid and ask price dynamics where the two prices form
due to interaction of buy and sell orders. In this model the two prices are
represented by eigenvalues of a 2x2 price operator corresponding to "bid" and
"ask" eigenstates. Matrix elements of price operator fluctuate in time which
results in ph... | finance |
4,475 | A Global Game with Heterogenous Priors | q-fin.TR | This paper relaxes the common prior assumption in the public and private
information game of Morris and Shin (2000, 2004). For the generalized game,
where the agent's prior expectations are heterogenous, it derives a sharp
condition for the emergence of unique/multiple equilibria. This condition
indicates that unique e... | finance |
4,476 | When Finance Meets Physics: The Impact of the Speed of Light on Financial Markets and their Regulation | q-fin.TR | Modern physics has demonstrated that matter behaves very differently as it
approaches the speed of light. This paper explores the implications of modern
physics to the operation and regulation of financial markets. Information
cannot move faster than the speed of light. The geographic separation of market
centers means... | finance |
4,477 | Market impact as anticipation of the order flow imbalance | q-fin.TR | In this paper, we assume that the permanent market impact of metaorders is
linear and that the price is a martingale. Those two hypotheses enable us to
derive the evolution of the price from the dynamics of the flow of market
orders. For example, if the market order flow is assumed to follow a nearly
unstable Hawkes pr... | finance |
4,478 | Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading | q-fin.TR | We build an agent-based model to study how the interplay between low- and
high-frequency trading affects asset price dynamics. Our main goal is to
investigate whether high-frequency trading exacerbates market volatility and
generates flash crashes. In the model, low-frequency agents adopt trading rules
based on chronol... | finance |
4,479 | On Simulation of Various Effects in Consolidated Order Book | q-fin.TR | This paper consists of two parts. The first part is devoted to empirical
analysis of consolidated order book (COB) for the index RTS futures. In the
second part we consider Poissonian multi--agent model of the COB. By varying
parameters of different groups of agents submitting orders to the book we are
able to model va... | finance |
4,480 | Prospect Theory for Online Financial Trading | q-fin.TR | Prospect theory is widely viewed as the best available descriptive model of
how people evaluate risk in experimental settings. According to prospect
theory, people are risk-averse with respect to gains and risk-seeking with
respect to losses, a phenomenon called "loss aversion". Despite of the fact
that prospect theory... | finance |
4,481 | Finding informed traders in futures and their inderlying assets in intraday trading | q-fin.TR | We propose a mathematical procedure for finding informed traders in
ultra-high frequency trading. We wrote it as Vector ARMA and found condition of
its stationarity. For the price exposure complied with ARMA(1,2) we proved that
underlying asset price difference can be derived as ARMA(1,1) process. For
validation of the... | finance |
4,482 | A reinforcement learning extension to the Almgren-Chriss model for optimal trade execution | q-fin.TR | Reinforcement learning is explored as a candidate machine learning technique
to enhance existing analytical solutions for optimal trade execution with
elements from the market microstructure. Given a volume-to-trade, fixed time
horizon and discrete trading periods, the aim is to adapt a given volume
trajectory such tha... | finance |
4,483 | Detecting informed activities in European-style option tradings | q-fin.TR | We propose a mathematical procedure for finding informed trader activities in
European-style options and their underlying asset. The regression model (9)
with moving average component was written. Being added to it ARMA-process for
log-price differences of underlying asset, the generalized model is written as
Vector AR... | finance |
4,484 | Dynamic optimal execution in a mixed-market-impact Hawkes price model | q-fin.TR | We study a linear price impact model including other liquidity takers, whose
flow of orders either follows a Poisson or a Hawkes process. The optimal
execution problem is solved explicitly in this context, and the closed-formula
optimal strategy describes in particular how one should react to the orders of
other trader... | finance |
4,485 | Analysis of a decision model in the context of equilibrium pricing and order book pricing | q-fin.TR | An agent-based model for financial markets has to incorporate two aspects:
decision making and price formation. We introduce a simple decision model and
consider its implications in two different pricing schemes. First, we study its
parameter dependence within a supply-demand balance setting. We find realistic
behavior... | finance |
4,486 | Modeling FX market activity around macroeconomic news: a Hawkes process approach | q-fin.TR | We present a Hawkes model approach to foreign exchange market in which the
high frequency price dynamics is affected by a self exciting mechanism and an
exogenous component, generated by the pre-announced arrival of macroeconomic
news. By focusing on time windows around the news announcement, we find that
the model is ... | finance |
4,487 | Does the "uptick rule" stabilize the stock market? Insights from Adaptive Rational Equilibrium Dynamics | q-fin.TR | This paper investigates the effects of the "uptick rule" (a short selling
regulation formally known as rule 10a-1) by means of a simple stock market
model, based on the ARED (adaptive rational equilibrium dynamics) modeling
framework, where heterogeneous and adaptive beliefs on the future prices of a
risky asset were f... | finance |
4,488 | One-level limit order book models with memory and variable spread | q-fin.TR | We propose a new model for the level I of a Limit Order Book (LOB), which
incorporates the information about the standing orders at the opposite side of
the book after each price change and the arrivals of new orders within the
spread. Our main result gives a diffusion approximation for the mid-price
process. To illust... | finance |
4,489 | VWAP Execution as an Optimal Strategy | q-fin.TR | The volume weighted average price (VWAP) execution strategy is well known and
widely used in practice. In this study, we explicitly introduce a trading
volume process into the Almgren-Chriss model, which is a standard model for
optimal execution. We then show that the VWAP strategy is the optimal execution
strategy for... | finance |
4,490 | Design and Implementation of Schedule-Based Trading Strategies Based on Uncertainty Bands | q-fin.TR | We propose a design for schedule-based execution trading strategies based on
uncertainty bands. This formulation: 1) simplifies strategy specification and
implementation; 2) provides for flexible allocation among passive,
opportunistic, aggressive, and dark pool crossing execution tactics; 3) allows
for rapid enhanceme... | finance |
4,491 | On the design of sell-side limit and market order tactics | q-fin.TR | This article provides a novel framework to evaluate limit order tactics that
highlights expected fill price, adverse price selection cost, and opportunity
cost. We formulate the problem of optimal execution of market orders with
nonlinear market impact, power law decay kernel, and stochastic and
deterministic liquidity... | finance |
4,492 | Optimal Execution with Dynamic Order Flow Imbalance | q-fin.TR | We examine optimal execution models that take into account both market
microstructure impact and informational costs. Informational footprint is
related to order flow and is represented by the trader's influence on the flow
imbalance process, while microstructure influence is captured by instantaneous
price impact. We ... | finance |
4,493 | Optimal execution of ASR contracts with fixed notional | q-fin.TR | Be it for taking advantage of stock undervaluation or in order to distribute
part of their profits to shareholders, firms may buy back their own shares. One
of the way they proceed is by including Accelerated Share Repurchases (ASR) as
part of their repurchase programs. In this article, we study the pricing and
optimal... | finance |
4,494 | Hydrodynamic limit of order book dynamics | q-fin.TR | In this paper, we establish a fluid limit for a two--sided Markov order book
model. Our main result states that in a certain asymptotic regime, a pair of
measure-valued processes representing the "sell-side shape" and "buy-side
shape" of an order book converges to a pair of deterministic measure-valued
processes in a c... | finance |
4,495 | A fully consistent, minimal model for non-linear market impact | q-fin.TR | We propose a minimal theory of non-linear price impact based on a linear
(latent) order book approximation, inspired by diffusion-reaction models and
general arguments. Our framework allows one to compute the average price
trajectory in the presence of a meta-order, that consistently generalizes
previously proposed pro... | finance |
4,496 | Market impacts and the life cycle of investors orders | q-fin.TR | In this paper, we use a database of around 400,000 metaorders issued by
investors and electronically traded on European markets in 2010 in order to
study market impact at different scales.
At the intraday scale we confirm a square root temporary impact in the daily
participation, and we shed light on a duration facto... | finance |
4,497 | Beyond the square root: Evidence for logarithmic dependence of market impact on size and participation rate | q-fin.TR | We make an extensive empirical study of the market impact of large orders
(metaorders) executed in the U.S. equity market between 2007 and 2009. We show
that the square root market impact formula, which is widely used in the
industry and supported by previous published research, provides a good fit only
across about tw... | finance |
4,498 | A Million Metaorder Analysis of Market Impact on the Bitcoin | q-fin.TR | We present a thorough empirical analysis of market impact on the Bitcoin/USD
exchange market using a complete dataset that allows us to reconstruct more
than one million metaorders. We empirically confirm the "square-root law'' for
market impact, which holds on four decades in spite of the quasi-absence of
statistical ... | finance |
4,499 | Optimal execution with nonlinear transient market impact | q-fin.TR | We study the problem of the optimal execution of a large trade in the
presence of nonlinear transient impact. We propose an approach based on
homotopy analysis, whereby a well behaved initial strategy is continuously
deformed to lower the expected execution cost. We find that the optimal
solution is front loaded for co... | finance |
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