Related papers: Market-Based Probability of Stock Returns
We consider the consumption-based asset pricing model, derive a new modified basic pricing equation, and present its successive approximations using the Taylor series expansions of the investor's utility during the averaging time interval.…
Fundamental variables in financial market are not only price and return but a very important role is also played by trading volumes. Here we propose a new multivariate model that takes into account price returns, logarithmic variation of…
Stock correlations is crucial to asset pricing, investor decision-making, and financial risk regulations. However, microscopic explanation based on agent-based modeling is still lacking. We here propose a model derived from minority game…
We study the price dynamics of stocks traded in a financial market by considering the statistical properties both of a single time series and of an ensemble of stocks traded simultaneously. We use the $n$ stocks traded in the New York Stock…
In this paper we develop models of asset return mean and covariance that depend on some observable market conditions, and use these to construct a trading policy that depends on these conditions, and the current portfolio holdings. After…
In a fixed time horizon, appropriately executing a large amount of a particular asset -- meaning a considerable portion of the volume traded within this frame -- is challenging. Especially for illiquid or even highly liquid but also highly…
We present an empirical study of the subordination hypothesis for a stochastic time series of a stock price. The fluctuating rate of trading is identified with the stochastic variance of the stock price, as in the continuous-time random…
Volatility, as a primary indicator of financial risk, forms the foundation of classical frameworks such as Markowitz's Portfolio Theory and the Efficient Market Hypothesis (EMH). However, its conventional use rests on assumptions-most…
The objective of this work is the investigation of complexity, asymmetry, stochasticity and non-linearity of the financial and economic systems by using the tools of statistical mechanics and information theory. More precisely, this thesis…
In this paper we propose a new stochastic model based on a generalization of semi-Markov chains to study the high frequency price dynamics of traded stocks. We assume that the financial returns are described by a weighted indexed…
Financial markets tend to switch between various market regimes over time, making stationarity-based models unsustainable. We construct a regime-switching model independent of asset classes for risk-adjusted return predictions based on…
The instability of historical risk factor correlations renders their use in estimating portfolio risk extremely questionable. In periods of market stress correlations of risk factors have a tendency to quickly go well beyond estimated…
The purpose of this work is to explore the role that arbitrage opportunities play in pricing financial derivatives. We use a non-equilibrium model to set up a stochastic portfolio, and for the random arbitrage return, we choose a stationary…
It is widely recognized that when classical optimal strategies are applied with parameters estimated from data, the resulting portfolio weights are remarkably volatile and unstable over time. The predominant explanation for this is the…
In this paper, we address one of the main puzzles in finance observed in the stock market by proponents of behavioral finance: the stock predictability puzzle. We offer a statistical model within the context of rational finance which can be…
In financial markets, greater volatility is usually considered synonym of greater risk and instability. However, large market downturns and upturns are often preceded by long periods where price returns exhibit only small fluctuations. To…
This paper builds a model of high-frequency equity returns by separately modeling the dynamics of trade-time returns and trade arrivals. Our main contributions are threefold. First, we characterize the distributional behavior of…
The fundamental theorem behind financial markets is that stock prices are intrinsically complex and stochastic. One of the complexities is the volatility associated with stock prices. Volatility is a tendency for prices to change…
We propose that predictability is a prerequisite for profitability on financial markets. We look at ways to measure predictability of price changes using information theoretic approach and employ them on all historical data available for…
Multivariate probability density functions of returns are constructed in order to model the empirical behavior of returns in a financial time series. They describe the well-established deviations from the Gaussian random walk, such as an…