Related papers: On a Constructive Theory of Markets
The purpose of this article is to propose a new "theory," the Strategic Analysis of Financial Markets (SAFM) theory, that explains the operation of financial markets using the analytical perspective of an enlightened gambler. The gambler…
Financial and gambling markets are ostensibly similar and hence strategies from one could potentially be applied to the other. Financial markets have been extensively studied, resulting in numerous theorems and models, while gambling…
I summarize the recent work on market (in)efficiency, highlighting key elements why financial markets will never be made efficient. My approach is not by adding more empirical evidence, but giving plausible reasons as to where inefficiency…
Stochastic portfolio theory aims at finding relative arbitrages, i.e. trading strategies which outperform the market with probability one. Functionally generated portfolios, which are deterministic functions of the market weights, are an…
Inefficient markets allow investors to consistently outperform the market. To demonstrate that inefficiencies exist in sports betting markets, we created a betting algorithm that generates above market returns for the NFL, NBA, NCAAF,…
Interaction strategies for reward in competitive environments are significantly influenced by the nature and extent of available information. In financial markets, particularly foreign exchange (forex), traders operate independently with…
In this review article we explore several recent advances in the quantitative modeling of financial markets. We begin with the Efficient Markets Hypothesis and describe how this controversial idea has stimulated a number of new directions…
The dynamics of financial markets are driven by the interactions between participants, as well as the trading mechanisms and regulatory frameworks that govern these interactions. Decision-makers would rather not ignore the impact of other…
We introduce a stochastic price model where, together with a random component, a moving average of logarithmic prices contributes to the price formation. Our model is tested against financial datasets, showing an extremely good agreement…
Empirical evidence suggests that even the most competitive markets are not strictly efficient. Price histories can be used to predict near future returns with a probability better than random chance. Many markets can be considered as {\it…
Financial derivatives have often been criticized as casino-style betting instruments. It turns out that many naive ways of making them are indeed equivalent to gambling. Fortunately, this inadvertent effect can be understood and prevented.…
Prediction markets are powerful tools to elicit and aggregate beliefs from strategic agents. However, in current prediction markets, agents may exhaust the social welfare by competing to be the first to update the market. We initiate the…
The game theory techniques are used to find the equilibrium of a market. Game theory refers to the ways in which strategic interactions among economic agents produce outcomes with respect to the preferences (or utilities) of those agents,…
Auctions are markets with strict regulations governing the information available to traders in the market and the possible actions they can take. Since well designed auctions achieve desirable economic outcomes, they have been widely used…
In this paper we focus on the beneficial role of random strategies in social sciences by means of simple mathematical and computational models. We briefly review recent results obtained by two of us in previous contributions for the case of…
In this paper we explore the specific role of randomness in financial markets, inspired by the beneficial role of noise in many physical systems and in previous applications to complex socio- economic systems. After a short introduction, we…
In this paper, making use of recent statistical physics techniques and models, we address the specific role of randomness in financial markets, both at the micro and the macro level. In particular, we review some recent results obtained…
In the current era of worldwide stock market interdependencies, the global financial village has become increasingly vulnerable to systemic collapse. The recent global financial crisis has highlighted the necessity of understanding and…
Prediction markets are useful for estimating probabilities of claims whose truth will be revealed at some fixed time -- this includes questions about the values of real-world events (i.e. statistical uncertainty), and questions about the…
The laws of chance are often subtle and deceptive. This is why games of chance work. People are convinced that they obey seemingly intuitive laws, while the underlying mathematical structure reveals a different and more complex reality.…