Related papers: The dynamics of the leverage cycle
This paper will examine a model with many agents, each of whom has a different belief about the dynamics of a risky asset. The agents are Bayesian and so learn about the asset over time. All agents are assumed to have a finite (but random)…
In normal times, it is assumed that financial institutions operating in non-overlapping sectors have complementary and distinct outcomes, typically reflected in mostly uncorrelated outcomes and asset returns. Such is the reasoning behind…
We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of…
Leverage is strongly related to liquidity in a market and lack of liquidity is considered a cause and/or consequence of the recent financial crisis. A repurchase agreement is a financial instrument where a security is sold simultaneously…
To identify emerging interdependencies between traded stocks we investigate the behavior of the stocks of FTSE 100 companies in the period 2000-2015, by looking at daily stock values. Exploiting the power of information theoretical measures…
It is well known that highly volatile control laws, while theoretically optimal for certain systems, are undesirable from an engineering perspective, being generally deleterious to the controlled system. In this article we are concerned…
We present a stochastic volatility market model where volatility is correlated with return and is represented by an Ornstein-Uhlenbeck process. With this model we exactly measure the leverage effect and other stylized facts, such as mean…
Modelling accurately financial price variations is an essential step underlying portfolio allocation optimization, derivative pricing and hedging, fund management and trading. The observed complex price fluctuations guide and constraint our…
We study a continuous-time portfolio choice problem for an investor whose state-dependent preferences are determined by an exogenous factor that evolves as an It\^o diffusion process. Since risk attitudes at the end of the investment…
Agent-based models help explain stock price dynamics as emergent phenomena driven by interacting investors. In this modeling tradition, investor behavior has typically been captured by two distinct mechanisms -- learning and heterogeneous…
We study a dynamical model of interconnected firms which allows for certain market imperfections and frictions, restricted here to be myopic price forecasts and slow adjustment of production. Whereas the standard rational equilibrium is…
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…
Based on a criterion of mathematical simplicity and consistency with empirical market data, a stochastic volatility model has been obtained with the volatility process driven by fractional noise. Depending on whether the stochasticity…
For an investor with constant absolute risk aversion and a long horizon, who trades in a market with constant investment opportunities and small proportional transaction costs, we obtain explicitly the optimal investment policy, its implied…
We present a novel approach for the bank's decision problem, incorporating Limited Liability in the objective function. Accordingly, we consider continuous time models, with and without Limited Liability. We compare the solutions of these…
The DebtRank algorithm has been increasingly investigated as a method to estimate the impact of shocks in financial networks, as it overcomes the limitations of the traditional default-cascade approaches. Here we formulate a dynamical…
We propose a new risk-constrained reformulation of the standard Linear Quadratic Regulator (LQR) problem. Our framework is motivated by the fact that the classical (risk-neutral) LQR controller, although optimal in expectation, might be…
An investor with constant relative risk aversion and an infinite planning horizon trades a risky and a safe asset with constant investment opportunities, in the presence of small transaction costs and a binding exogenous portfolio…
Agents' heterogeneity is recognized as a driver mechanism for the persistence of financial volatility. We focus on the multiplicity of investment strategies' horizons, we embed this concept in a continuous time stochastic volatility…
We propose a non linear Langevin equation as a model for stock market fluctuations and crashes. This equation is based on an identification of the different processes influencing the demand and supply, and their mathematical transcription.…