Related papers: The dynamics of the leverage cycle
The coupled nonlinear volatility and option pricing model presented recently by Ivancevic is investigated, which generates a leverage effect, i.e., stock volatility is (negatively) correlated to stock returns, and can be regarded as a…
This paper considers a statistical signal processing problem involving agent based models of financial markets which at a micro-level are driven by socially aware and risk- averse trading agents. These agents trade (buy or sell) stocks by…
We study several aspects of the so-called low-vol and low-beta anomalies, some already documented (such as the universality of the effect over different geographical zones), others hitherto not clearly discussed in the literature. Our most…
The leverage effect refers to the generally negative correlation between the return of an asset and the changes in its volatility. There is broad agreement in the literature that the effect should be present for theoretical reasons, and it…
We consider a tick-by-tick model of price formation, in which buy and sell orders are modeled as self-exciting point processes (Hawkes process), similar to the one in [Bacry, Delattre, Hoffmann, Muzy, Modelling microstructure noise with…
We study how the phenomenon of contagion can take place in the network of the world's stock exchanges due to the behavioral trait "blindeness to small changes". On large scale individual, the delay in the collective response may…
We explore the nonlinear dynamics of a macroeconomic model with resource constraints. The dynamics is derived from a production function that considers capital and a generalized form of energy as inputs. Energy, the new variable, is…
Notwithstanding the usefulness of system dynamics in analyzing complex policy problems, policy design is far from straightforward and in many instances trial-and-error driven. To address this challenge, we propose to combine system dynamics…
Procyclicality of historical risk measure estimation means that one tends to over-estimate future risk when present realized volatility is high and vice versa under-estimate future risk when the realized volatility is low. Out of it…
We revisit the index leverage effect, that can be decomposed into a volatility effect and a correlation effect. We investigate the latter using a matrix regression analysis, that we call `Principal Regression Analysis' (PRA) and for which…
Risk-sensitive control balances performance with resilience to unlikely events in uncertain systems. This paper introduces ergodic-risk criteria, which capture long-term cumulative risks through probabilistic limit theorems. By ensuring the…
The naive application of Reinforcement Learning algorithms to continuous control problems -- such as locomotion and manipulation -- often results in policies which rely on high-amplitude, high-frequency control signals, known colloquially…
Wealth inequality remains a critical socioeconomic challenge, driven by systemic dynamics and self-reinforcing mechanisms that amplify the economic imbalances. Simplified models from statistical physics provide valuable insights into the…
Simple agent based exchange models are a commonplace in the study of wealth distribution in an artificial economy. Generally, in a system that is composed of many agents characterized by their wealth and risk-aversion factor, two agents are…
This paper considers time-inconsistent problems when control and stopping strategies are required to be made simultaneously (called stopping control problems by us). We first formulate the timeinconsistent stopping control problems under…
We review the evidence that the erratic dynamics of markets is to a large extent of endogenous origin, i.e. determined by the trading activity itself and not due to the rational processing of exogenous news. In order to understand why and…
Motivated by the current global high inflation scenario, we aim to discover a dynamic multi-period allocation strategy to optimally outperform a passive benchmark while adhering to a bounded leverage limit. To this end, we formulate an…
Previous literature shows that prevalent risk measures such as Value at Risk or Expected Shortfall are ineffective to curb excessive risk-taking by a tail-risk-seeking trader with S-shaped utility function in the context of portfolio…
We investigate the effects of the social interactions of a finite set of agents on an equilibrium pricing mechanism. A derivative written on non-tradable underlyings is introduced to the market and priced in an equilibrium framework by…
We define a financial bubble as a period of unsustainable growth, when the price of an asset increases ever more quickly, in a series of accelerating phases of corrections and rebounds. More technically, during a bubble phase, the price…