Related papers: Spiraling toward market completeness and financial…
Modern economies evolved from simpler human exchanges into very convoluted systems. Today, a multitude of aspects can be regulated, tampered with, or left to chance; these are economic {\em degrees of freedom} which together shape the flow…
The problem of allocating scarce items to individuals is an important practical question in market design. An increasingly popular set of mechanisms for this task uses the concept of market equilibrium: individuals report their preferences,…
The origin of economic crises is a key problem for economics. We present a model of long-run competitive markets to show that the multiplicity of behaviors in an economic system, over a long time scale, emerge as statistical regularities…
Machine learning (especially reinforcement learning) methods for trading are increasingly reliant on simulation for agent training and testing. Furthermore, simulation is important for validation of hand-coded trading strategies and for…
The basis of arbitrage methods depends on the circulation of information within the framework of the financial market. Following the work of Modigliani and Miller, it has become a vital part of discussions related to the study of financial…
We start with the idea that open quantum systems can be used to represent financial markets by modelling events from the external environment and their impact on the market price. We show how to characterize distinct orbits of the time…
In this chapter we review some recent results on the dynamics of price formation in financial markets and its relations with the efficient market hypothesis. Specifically, we present the limit order book mechanism for markets and we…
We consider the economic problem of optimal consumption and investment with power utility. We study the optimal strategy as the relative risk aversion tends to infinity or to one. The convergence of the optimal consumption is obtained for…
After the shocking series of bankruptcies started in 2008, the public does not trust anymore the classical methods of assessing business risks. The global economic severe downturn caused demand for both developed and emerging economies'…
Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current…
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…
This paper studies the optimal investment problem with random endowment in an inventory-based price impact model with competitive market makers. Our goal is to analyze how price impact affects optimal policies, as well as both pricing rules…
We study an optimal consumption and investment problem in a possibly incomplete market with general, not necessarily convex, stochastic constraints. We give explicit solutions for investors with exponential, logarithmic and power utility.…
In this paper, we propose a dynamical model to capture cascading failures among interconnected organizations in the global financial system. Failures can take the form of bankruptcies, defaults, and other insolvencies. The network that…
Trading frictions are stochastic. They are, moreover, in many instances fast-mean reverting. Here, we study how to optimally trade in a market with stochastic price impact and study approximations to the resulting optimal control problem…
This paper introduces a new algorithmic execution model that integrates interbank limit and market orders with internal liquidity generated through market making. Based on the Cartea et al.\cite{cartea2015algorithmic} framework, we…
The global financial system can be represented as a large complex network in which banks, hedge funds and other financial institutions are interconnected to each other through visible and invisible financial linkages. Recently, a lot of…
We revisit optimal execution of an active portfolio in the presence of slippage (aka linear, proportional, or absolute-value) costs. Market efficiency implies a close balance between active alphas and trading costs, so even small changes to…
Prices in financial markets exhibit extreme jumps far more often than can be accounted for by external news. Further, magnitudes of price changes are correlated over long times. These so called stylized facts are quantified by scaling laws…
We investigate the general structure of optimal investment and consumption with small proportional transaction costs. For a safe asset and a risky asset with general continuous dynamics, traded with random and time-varying but small…