Related papers: Endogenous Representation of Asset Returns
We demonstrate that minority mechanisms arise in the dynamics of markets because of effects of price impact; accordingly the relative importance of minority and delayed majority mechanisms depends on the frequency of trading. We then use…
In this paper, we measure systematic risk with a new nonparametric factor model, the neural network factor model. The suitable factors for systematic risk can be naturally found by inserting daily returns on a wide range of assets into the…
We motivate the study of the crypto asset class with eleven empirical facts, and study the drivers of crypto asset returns through the lens of univariate factors. We argue crypto assets are a new, attractive, and independent asset class. In…
Being able to predict the occurrence of extreme returns is important in financial risk management. Using the distribution of recurrence intervals---the waiting time between consecutive extremes---we show that these extreme returns are…
It has been widely observed that capitalization-weighted indexes can be beaten by surprisingly simple, systematic investment strategies. Indeed, in the U.S. stock market, equal-weighted portfolios, random-weighted portfolios, and other…
A new methodology has been introduced to clean the correlation matrix of single stocks returns based on a constrained principal component analysis using financial data. Portfolios were introduced, namely "Fundamental Maximum Variance…
We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French's data…
We decompose returns for portfolios of bottom-ranked, lower-priced assets relative to the market into rank crossovers and changes in the relative price of those bottom-ranked assets. This decomposition is general and consistent with…
We introduce a neural network approach for assessing the risk of a portfolio of assets and liabilities over a given time period. This requires a conditional valuation of the portfolio given the state of the world at a later time, a problem…
We consider infinite dimensional optimization problems motivated by the financial model called Arbitrage Pricing Theory. Using probabilistic and functional analytic tools, we provide a dual characterization of the super-replication cost.…
We introduce a new measure of activity of financial markets that provides a direct access to their level of endogeneity. This measure quantifies how much of price changes are due to endogenous feedback processes, as opposed to exogenous…
Risk control and optimal diversification constitute a major focus in the finance and insurance industries as well as, more or less consciously, in our everyday life. We present a discussion of the characterization of risks and of the…
We develop a new stock market index that captures the chaos existing in the market by measuring the mutual changes of asset prices. This new index relies on a tensor-based embedding of the stock market information, which in turn frees it…
We explain the main concepts of Prospect Theory and Cumulative Prospect Theory within the framework of rational dynamic asset pricing theory. We derive option pricing formulas when asset returns are altered with a generalized Prospect…
The Pareto model is very popular in risk management, since simple analytical formulas can be derived for financial downside risk measures (Value-at-Risk, Expected Shortfall) or reinsurance premiums and related quantities (Large Claim Index,…
Financial scenario simulation is essential for risk management and portfolio optimization, yet it remains challenging especially in high-dimensional and small data settings common in finance. We propose a diffusion factor model that…
This thesis develops equilibrium asset pricing models in incomplete markets with a large number of heterogeneous agents using mean field game theory. The market equilibrium is characterized by a novel form of mean field backward stochastic…
This paper re-examines the problem of estimating risk premia in linear factor pricing models. Typically, the data used in the empirical literature are characterized by weakness of some pricing factors, strong cross-sectional dependence in…
We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently…
The present study introduce the human capital component to the Fama and French five-factor model proposing an equilibrium six-factor asset pricing model. The study employs an aggregate of four sets of portfolios mimicking size and industry…