Related papers: Leverage Causes Fat Tails and Clustered Volatility
It has been widely observed that capitalization-weighted indexes can be beaten by surprisingly simple, systematic investment strategies. Indeed, in the U.S. stock market, equal-weighted portfolios, random-weighted portfolios, and other…
In this paper we present a novel approach to the determination of fat tails in financial data by studying the information contained in the limit order book. In an order-driven market buyers and sellers may submit limit orders, which are…
Financial markets display scale-free behavior in many different aspects. The power-law behavior of part of the distribution of individual wealth has been recognized by Pareto as early as the nineteenth century. Heavy-tailed and scale-free…
With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the…
We consider a model of a simple financial system consisting of a leveraged investor that invests in a risky asset and manages risk by using Value-at-Risk (VaR). The VaR is estimated by using past data via an adaptive expectation scheme. We…
The scale and terms of aggregate borrowing in an economy depend on the manner in which wealth is distributed across potential creditors with heterogeneous beliefs about the future. This distribution evolves over time as uncertainty is…
The question of optimal portfolio is addressed. The conventional Markowitz portfolio optimisation is discussed and the shortcomings due to non-Gaussian security returns are outlined. A method is proposed to minimise the likelihood of…
In modern portfolio theory, the balancing of expected returns on investments against uncertainties in those returns is aided by the use of utility functions. The Kelly criterion offers another approach, rooted in information theory, that…
While the use of volatilities is pervasive throughout finance, our ability to determine the instantaneous volatility of stocks is nascent. Here, we present a method for measuring the temporal behavior of stocks, and show that stock prices…
The influence of the past price behaviour on the realized volatility is investigated in the present article. The results show that trending (drifting) prices lead to increased (decreased) realized volatility. This ``volatility induced by…
Why do companies choose particular capital structures? A compelling answer to this question remains elusive despite extensive research. In this article, we use double machine learning to examine the heterogeneous causal effect of credit…
We use the P&L on a particular class of swaps, representing variance and higher moments for log returns, as estimators in our empirical study on the S&P500 that investigates the factors determining variance and higher-moment risk premia.…
We present a limits-to-arbitrage model to study the impact of securitization, leverage and credit risk protection on the cyclicity of bank credit. In a stable bank credit situation, no cycles of credit expansion or contraction appear.…
We analyze quantitatively the effect of spurious multifractality induced by the presence of fat-tailed symmetric and asymmetric probability distributions of fluctuations in time series. In the presented approach different kinds of symmetric…
We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts…
We review recent progress in modeling credit risk for correlated assets. We start from the Merton model which default events and losses are derived from the asset values at maturity. To estimate the time development of the asset values, the…
We run experimental asset markets to investigate the emergence of excess trading and the occurrence of synchronised trading activity leading to crashes in the artificial markets. The market environment favours early investment in the risky…
We show that financial correlations exhibit a non-trivial dynamic behavior. We introduce a simple phenomenological model of a multi-asset financial market, which takes into account the impact of portfolio investment on price dynamics. This…
Volatility-based trading strategies have attracted a lot of attention in financial markets due to their ability to capture opportunities for profit from market dynamics. In this article, we propose a new volatility-based trading strategy…
I show that if the capital accumulation dynamics is stochastic a new term, in addition to that given by accounting prices, has to be introduced in order to derive a correct estimate of the genuine wealth of an economy. In a simple model…