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The purpose of these notes is to provide a systematic quantitative framework - in what is intended to be a "pedagogical" fashion - for discussing mean-reversion and optimization. We start with pair trading and add complexity by following…
If a measurement process is regarded as an irreversible process, then by Second law of thermodynamics the entropy should increase after any measurement process. By the same spirit a quantum system undergoing repeated measurement should show…
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…
We give an explicit algorithm and source code for extracting expected returns for stocks from expected returns for alphas. Our algorithm altogether bypasses combining alphas with weights into "alpha combos". Simply put, we have developed a…
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…
We analyze the revenue loss due to market shrinkage. Specifically, consider a simple market with one item for sale and $n$ bidders whose values are drawn from some joint distribution. Suppose that the market shrinks as a single bidder…
Historical returns depend on historical closing prices and distributions. We describe how to compute adjusted closing prices from closing price/distribution data with an emphasis on spreadsheet implementation. Then the growth of a security…
As a mainstream marketing channel on the Internet, Search Engine Advertising (SEA) has a huge business impact and attracts a plethora of attention from both academia and industry. One important goal of advertising is to increase sales.…
We study the distributional implications of uncertainty shocks by developing a model that links macroeconomic aggregates to the US distribution of earnings and consumption. We find that: initially, the fraction of low-earning workers…
We analyze the potential of reinsurance for reversing the current trend of decreasing capital guarantees in life insurance products. Providing an insurer with an opportunity to shift part of the financial risk to a reinsurer, we solve the…
There is growing experimental evidence that $Q$-learning agents may learn to charge supracompetitive prices. We provide the first theoretical explanation for this behavior in infinite repeated games. Firms update their pricing policies…
Portfolio management (PM) is a fundamental financial trading task, which explores the optimal periodical reallocation of capitals into different stocks to pursue long-term profits. Reinforcement learning (RL) has recently shown its…
We extend the analysis of investment strategies derived from penalized quantile regression models, introducing alternative approaches to improve state\textendash of\textendash art asset allocation rules. First, we use a post\textendash…
We investigate the effects of stockholding on households' attention to the macroeconomy. Households' attentiveness is measured by their accuracy of inflation expectations and perceptions. Relative to non-stockholders, stockholders produce…
Financial stock returns correlations have been studied in the prism of random matrix theory, to distinguish the signal from the "noise". Eigenvalues of the matrix that are above the rescaled Marchenko Pastur distribution can be interpreted…
This paper employs an intra-personal game-theoretic framework to investigate how decreasing impatience influences irreversible investment behaviors in a continuous-time setting. We consider a capacity expansion problem under weighted…
With the recent administration change in Mexico, the fluctuations in national energy policy have generated widespread concerns among investors and the public. The debate centers around Mexico's energy dependence on the US and how Mexico's…
Almost every public pension system shares two attributes: earning deductions to finance benefits, and benefits that depend on earnings. This paper analyzes theoretically and empirically the trade-off between social insurance and incentive…
We develop an empirical procedure to qunatify future company performance based on top management promises. We find that the number of future tense sentence occurrences in 10-K reports is significantly negatively correlated with the return…
This paper introduces a novel methodology for the pricing and management of share buyback contracts, overcoming the limitations of traditional optimal control methods, which frequently encounter difficulties with high-dimensional state…