Related papers: Variance dispersion and correlation swaps
We study the relationship between price spread, volatility and trading volume. We find that spread forms as a result of interplay between order liquidity and order impact. When trading volume is small adding more liquidity helps improve…
Option written on several foreign exchange rates (FXRs) depends on correlation between the rates. To evaluate the option, historical estimates for correlations can be used but usually they are not stable. More significantly, pricing of the…
We propose a general interpretation for long-range correlation effects in the activity and volatility of financial markets. This interpretation is based on the fact that the choice between `active' and `inactive' strategies is subordinated…
We present an empirical study of the subordination hypothesis for a stochastic time series of a stock price. The fluctuating rate of trading is identified with the stochastic variance of the stock price, as in the continuous-time random…
The collateral choice option allows a collateral-posting party the opportunity to change the type of security in which the collateral is deposited. Due to non-zero collateral basis spreads, this optionality significantly impacts asset…
Discretely sampled variance and volatility swaps trade actively in OTC markets. To price these swaps, the continuously sampled approximation is often used to simplify the computations. The purpose of this paper is to study the conditions…
How do cost shocks pass through to prices in markets with price dispersion? We decompose the problem into two layers. In the competition layer, consumers' consideration sets determine equilibrium distributions of normalized margins. In the…
This study is a detailed analysis of Speculation Game, a minimal agent-based model of financial markets, in which the round-trip trading and the dynamic wealth evolution with variable trading volumes are implemented. Instead of herding…
Option prices encode the market's collective outlook through implied density and implied volatility. An explicit link between implied density and implied volatility translates the risk-neutrality of the former into conditions on the latter…
In stochastic volatility models based on time-homogeneous diffusions, we provide a simple necessary and sufficient condition for the discretely sampled fair strike of a variance swap to converge to the continuously sampled fair strike. It…
The marginal correlation between two variables is a measure of their linear dependence. The two original variables need not interact directly, because marginal correlation may arise from the mediation of other variables in the system. The…
Value at risk (VaR) is a risk measure that has been widely implemented by financial institutions. This paper measures the correlation among asset price changes implied from VaR calculation. Empirical results using US and UK equity indexes…
Using Trades and Quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delicate interplay between two opposite tendencies: long-range correlated market orders that lead to…
We develop a new framework to detect wash trading in crypto assets through real-time liquidity fluctuation. We propose that short-term price jumps in crypto assets results from wash trading-induced liquidity fluctuation, and construct two…
Single index financial market models cannot account for the empirically observed complex interactions between shares in a market. We describe a multi-share financial market model and compare characteristics of the volatility, that is the…
A positive correlation between exposure and counterparty credit risk gives rise to the so-called Wrong-Way Risk (WWR). Even after a decade of the financial crisis, addressing WWR in both sound and tractable ways remains challenging.…
We examine the Foreign Exchange (FX) spot price spreads with and without Last Look on the transaction. We assume that brokers are risk-neutral and they quote spreads so that losses to latency arbitrageurs (LAs) are recovered from other…
Portfolio diversification is a cornerstone of modern finance, while risk aversion is central to decision theory; both concepts are long-standing and foundational. We investigate their connections by studying how different forms of…
In this paper we study the pricing of exchange options when underlying assets have stochastic volatility and stochastic correlation. An approximation using a closed-form approximation based on a Taylor expansion of the conditional price is…
We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called "value investing", i.e. systematically attempting to buy underpriced assets. When funds…