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In this paper, we develop a theory of market crashes resulting from a deleveraging shock. We consider two representative investors in a market holding different opinions about the public available information. The deleveraging shock forces…
This article provides a simple explanation of the asymptotic concavity of the price impact of a meta-order via the microstructural properties of the market. This explanation is made more precise by a model in which the local relationship…
This paper initiates a study into the century-old issue of market predictability from the perspective of computational complexity. We develop a simple agent-based model for a stock market where the agents are traders equipped with simple…
Short sales are regarded as negative purchases in textbook asset pricing theory. In reality, however, the symmetry between purchases and short sales is broken by a variety of costs and risks peculiar to the latter. We formulate an optimal…
Stock price change in financial market occurs through transactions in analogy with diffusion in stochastic physical systems. The analysis of price changes in real markets shows that long-range correlations of price fluctuations largely…
We consider an illiquid financial market where a risk averse investor has to liquidate a portfolio within a finite time horizon [0,T] and can trade continuously at a traditional exchange (the "primary venue") and in a dark pool. At the…
We study a dynamic asset pricing problem in which a representative agent is ambiguous about the aggregate endowment growth rate and trades a risky stock, human capital, and a risk-free asset to maximize her preference value of consumption…
Financial markets are subject to long periods of polarized behavior, such as bull-market or bear-market phases, in which the vast majority of market participants seem to almost exclusively choose one action (between buying or selling) over…
The aim of this research is to give a simple framework to evaluate/quantize the "transparency" of a firm. We assume that the process of the firm value is only observable once in a while but is strongly correlated with the stock price which…
This paper studies Markov perfect equilibria in a repeated duopoly model where sellers choose algorithms. An algorithm is a mapping from the competitor's price to own price. Once set, algorithms respond quickly. Customers arrive randomly…
It is now well established empirically that financial price changes are distributed according to a power law, with cubic exponent. This is a fascinating regularity, as it holds for various classes of securities, on various markets, and on…
To investigate the universality of the structure of interactions in different markets, we analyze the cross-correlation matrix C of stock price fluctuations in the National Stock Exchange (NSE) of India. We find that this emerging market…
The speculation game is an agent-based toy model to investigate the dynamics of the financial market. Our model has achieved the reproduction of 10 of the well-known stylized facts for financial time series. However, there is also a…
The practice of valuation by marking-to-market with current trading prices is seriously flawed. Under leverage the problem is particularly dramatic: due to the concave form of market impact, selling always initially causes the expected…
A shadow price is a process lying within the bid/ask prices of a market with proportional transaction costs, such that maximizing expected utility from consumption in the frictionless market with this price process leads to the same maximal…
It is essential to incorporate the impact of investor behavior when modeling the dynamics of asset returns. In this paper, we reconcile behavioral finance and rational finance by incorporating investor behavior within the framework of…
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…
Pricing a multi-asset derivative is an important problem in financial engineering, both theoretically and practically. Although it is suitable to numerically solve partial differential equations to calculate the prices of certain types of…
Building on ideas from online convex optimization, we propose a general framework for the design of efficient securities markets over very large outcome spaces. The challenge here is computational. In a complete market, in which one…
This study explores the behavioral dynamics of illiquid stock prices in a listed stock market. Illiquidity, characterized by wide bid and ask spreads affects price formation by decoupling prices from standard risk and return relationships…