Related papers: Exploiting arbitrage requires short selling
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…
Statistical arbitrage methods identify mispricings in securities with the goal of building portfolios which are weakly correlated with the market. In pairs trading, an arbitrage opportunity is identified by observing relative price…
I unravel the basic long run dynamics of the broker call money market, which is the pile of cash that funds margin loans to retail clients (read: continuous time Kelly gamblers). Call money is assumed to supply itself perfectly…
We study partial hedging for game options in markets with transaction costs bounded from below. More precisely, we assume that the investor's transaction costs for each trade are the maximum between proportional transaction costs and a…
We consider networks of banks with assets and liabilities. Some banks may be insolvent, and a central bank can decide which insolvent banks, if any, to bail out. We view bailouts as an optimization problem where the central bank has given…
I derive practical formulas for optimal arrangements between sophisticated stock market investors (namely, continuous-time Kelly gamblers or, more generally, CRRA investors) and the brokers who lend them cash for leveraged bets on a high…
Risk-neutral pricing dictates that the discounted derivative price is a martingale in a measure equivalent to the economic measure. The residual ambiguity for incomplete markets is here resolved by minimising the entropy of the price…
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open…
This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are…
We present a limits-to-arbitrage model to study the impact of securitization, leverage and credit risk protection on the cyclicity of bank credit. In a stable bank credit situation, no cycles of credit expansion or contraction appear.…
We study how individuals trade off outcome ("what") and process ("how") utility in high-stakes strategic decisions, namely professional tennis. Using optimality conditions and the second-service rule, we derive a sufficient condition for…
Consider a discrete-time infinite horizon financial market model in which the logarithm of the stock price is a time discretization of a stochastic differential equation. Under conditions different from those given in a previous paper of…
Trades based on bilateral (indivisible) contracts can be represented by a network. Vertices correspond to agents while arcs represent the non-price elements of a bilateral contract. Given prices for each arc, agents choose the incident arcs…
In this paper we examine inefficiencies and information disparity in the Japanese stock market. By carefully analysing information publicly available on the internet, an `outsider' to conventional statistical arbitrage strategies--which are…
In this paper, we propose a clearing model for prices in a financial markets due to margin calls on short sold assets. In doing so, we construct an explicit formulation for the prices that would result immediately following asset purchases…
In this paper, we study which data can be induced by a correlated equilibrium given a known finite simultaneous move game. We assume that an analyst has access to the frequency of each agent's actions but does not have access to the…
Constant and symmetric price impact functions, most commonly used in agent-based market modelling, are shown to give rise to paradoxical and inconsistent outcomes in the simplest case of arbitrage exploitation when open-hold-close actions…
I show that firms price almost competitively and consumers can infer product quality from prices in markets where firms differ in quality and production cost, and learning prices is costly. Bankruptcy risk or regulation links higher quality…
For utility maximization problems under proportional transaction costs, it has been observed that the original market with transaction costs can sometimes be replaced by a frictionless "shadow market" that yields the same optimal strategy…
We consider a financial market model with a single risky asset whose price process evolves according to a general jump-diffusion with locally bounded coefficients and where market participants have only access to a partial information flow.…