Related papers: Absolute Return Volatility
The problem of non-stationarity in financial markets is discussed and related to the dynamic nature of price volatility. A new measure is proposed for estimation of the current asset volatility. A simple and illustrative explanation is…
We review the nature of some well-known phenomena such as volatility smiles, convexity adjustments and parallel derivative markets. We propose that the market is incomplete and postulate the existence of intrinsic risks in every contingent…
I study the limit of a large random economy, where a set of consumers invests in financial instruments engineered by banks, in order to optimize their future consumption. This exercise shows that, even in the ideal case of perfect…
Working on different aspects of algorithmic trading we empirically discovered a new market invariant. It links together the volatility of the instrument with its traded volume, the average spread and the volume in the order book. The…
This paper examines how shocks to currency volatilities predict exchange rates. Using option-implied volatilities, we construct a dynamic, directed network of volatility connections. Currencies that transmit more volatility shocks, which…
Factor models have become a common and valued tool for understanding the risks associated with an investing strategy. In this report we describe Exabel's factor model, we quantify the fraction of the variability of the returns explained by…
We study the most famous example of a large financial market: the Arbitrage Pricing Model, where investors can trade in a one-period setting with countably many assets admitting a factor structure. We consider the problem of maximising…
We study the optimal investment problem for a continuous time incomplete market model such that the risk-free rate, the appreciation rates and the volatility of the stocks are all random; they are assumed to be independent from the driving…
In real-world decision-making problems, for instance in the fields of finance, robotics or autonomous driving, keeping uncertainty under control is as important as maximizing expected returns. Risk aversion has been addressed in the…
We analyze correlations among stock returns via a series of widely adopted parameters which we refer to as explanatory variables. We subsequently exploit the results to propose a long only quantitative adaptive technique to construct a…
Given a new candidate asset represented as a time series of returns, how should a quantitative investment manager be thinking about assessing its usefulness? This is a key qualitative question inherent to the investment process which we aim…
We consider in this paper some structured financial products, known as reverse convertible notes, that resulted in substantial losses to certain buyers of these notes in recent years. We shall focus on specific reverse convertible notes…
We investigate the stability of the Epstein-Zin problem with respect to small distortions in the dynamics of the traded securities. We work in incomplete market model settings, where our parametrization of perturbations allows for joint…
Proof that under simple assumptions, such as constraints of Put-Call Parity, the probability measure for the valuation of a European option has the mean derived from the forward price which can, but does not have to be the risk-neutral one,…
The introduction of transaction costs into the theory of option pricing could lead not only to the change of return for options, but also to the change of the volatility. On the base of assumption of the portfolio analysis, a new equation…
Diversification return is an incremental return earned by a rebalanced portfolio of assets. The diversification return of a rebalanced portfolio is often incorrectly ascribed to a reduction in variance. We argue that the underlying source…
In portfolio risk minimization, the inverse covariance matrix of returns is often unknown and has to be estimated in practice. This inverse covariance matrix also prescribes the hedge trades in which a stock is hedged by all the other…
This paper analyzes the hypothesis that returns play a risk-compensating role in the market for corporate revolving lines of credit. Specifically, we test whether borrower risk and the expected return on these debt instruments are…
We suggest an empirical model of investment strategy returns which elucidates the importance of non-Gaussian features, such as time-varying volatility, asymmetry and fat tails, in explaining the level of expected returns. Estimating the…
Volatility measures the amplitude of price fluctuations. Despite it is one of the most important quantities in finance, volatility is not directly observable. Here we apply a maximum likelihood method which assumes that price and volatility…