Related papers: The Nature of Alpha
This paper builds a model of high-frequency equity returns by separately modeling the dynamics of trade-time returns and trade arrivals. Our main contributions are threefold. First, we characterize the distributional behavior of…
We introduce a faithful representation of the heavy tail multivariate distribution of asset returns, as parsimonous as the Gaussian framework. Using calculation techniques of functional integration and Feynman diagrams borrowed from…
We analyzed multifractal properties of 5-minute stock returns from a period of over two years for 100 highly capitalized American companies. The two sources: fat-tailed probability distributions and nonlinear temporal correlations, vitally…
We present extensive evidence that ``risk premium'' is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit an approximately linear relation between the…
In a seminal paper in 1973, Black and Scholes argued how expected distributions of stock prices can be used to price options. Their model assumed a directed random motion for the returns and consequently a lognormal distribution of asset…
In financial markets, greater volatility is usually considered synonym of greater risk and instability. However, large market downturns and upturns are often preceded by long periods where price returns exhibit only small fluctuations. To…
One approach to the analysis of stochastic fluctuations in market prices is to model characteristics of investor behaviour and the complex interactions between market participants, with the aim of extracting consequences in the aggregate.…
We develop a theoretical trading conditioning model subject to price volatility and return information in terms of market psychological behavior, based on analytical transaction volume-price probability wave distributions in which we use…
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 performance of trend following strategies can be ascribed to the difference between long-term and short-term realized variance. We revisit this general result and show that it holds for various definitions of trend strategies. This…
Markets have internal dynamics leading to excess volatility and other phenomena that are difficult to explain using rational expectations models. This paper studies these using a nonequilibrium price formation rule, developed in the context…
This dissertation investigates the ability of the Ising model to replicate statistical characteristics, or stylized facts, commonly observed in financial assets. The study specifically examines in the S&P500 index the following features:…
This paper investigates short-term behaviors of implied volatility of derivatives written on indexes in equity markets when the index processes are constructed by using a ranking procedure. Even in simple market settings where stock prices…
We propose a parsimonious quantile regression framework to learn the dynamic tail behaviors of financial asset returns. Our model captures well both the time-varying characteristic and the asymmetrical heavy-tail property of financial time…
Previous research has shown that for stock indices, the most likely time until a return of a particular size has been observed is longer for gains than for losses. We establish that this so-called gain/loss asymmetry is present also for…
This paper develops and estimates a multivariate affine GARCH(1,1) model with Normal Inverse Gaussian innovations that captures time-varying volatility, heavy tails, and dynamic correlation across asset returns. We generalize the…
In a market with a rough or Markovian mean-reverting stochastic volatility there is no perfect hedge. Here it is shown how various delta-type hedging strategies perform and can be evaluated in such markets in the case of European options. A…
A common belief is that leveraged ETFs (LETFs) suffer long-term performance decay due to \emph{volatility drag}. We show that this view is incomplete: LETF performance depends fundamentally on return autocorrelation and return dynamics. In…
Standard, PCA-based factor analysis suffers from a number of well known problems due to the random nature of pairwise correlations of asset returns. We analyse an alternative based on ICA, where factors are identified based on their…
In this paper we provide a comprehensive analysis of a structural model for the dynamics of prices of assets traded in a market originally proposed in [1]. The model takes the form of an interacting generalization of the geometric Brownian…