Related papers: The Cost of Misspecifying Price Impact
Recent research on the response of stock prices to trading activity revealed long lasting effects, even across stocks of different companies. These results imply non-Markovian effects in price formation and when trading many stocks at the…
This work proposes a way to align statistical modeling with decision making. We provide a method that propagates the uncertainty in predictive modeling to the uncertainty in operational cost, where operational cost is the amount spent by…
Our goal in this paper is to study the market impact in a market in which the order flow is autocorrelated. We build a model which explains qualitatively and quantitatively the empirical facts observed so far concerning market impact. We…
We consider the problem of option hedging in a market with proportional transaction costs. Since super-replication is very costly in such markets, we replace perfect hedging with an expected loss constraint. Asymptotic analysis for small…
There is vast empirical evidence that given a set of assumptions on the real-world dynamics of an asset, the European options on this asset are not efficiently priced in options markets, giving rise to arbitrage opportunities. We study…
This paper studies the optimal investment problem with random endowment in an inventory-based price impact model with competitive market makers. Our goal is to analyze how price impact affects optimal policies, as well as both pricing rules…
We compare the predictions of the stationary Kyle model, a microfounded multi-step linear price impact model in which market prices forecast fundamentals through information encoded in the order flow, with those of the propagator model, a…
Devising models of the limit order book that realistically reproduce the market response to exogenous trades is extremely challenging and fundamental in order to test trading strategies. We propose a novel explainable model for small tick…
We introduce a trade strategy representation theorem for performance measurement and portable alpha in high frequency trading, by embedding a robust trading algorithm that describe portfolio manager market timing behavior, in a canonical…
We consider the randomness of market trade as the origin of price and return stochasticity. We look at time series of trade values and volumes as random variables during the averaging interval {\Delta} and describe the dependences of…
Motivated by the practical challenge in monitoring the performance of a large number of algorithmic trading orders, this paper provides a methodology that leads to automatic discovery of the causes that lie behind a poor trading…
We present a formulation of the transaction cost analysis (TCA) in the Bayesian framework for the primary purpose of comparing broker algorithms using standardized benchmarks. Our formulation allows effective calculation of the expected…
Estimating uncertainty of machine learning models is essential to assess the quality of the predictions that these models provide. However, there are several factors that influence the quality of uncertainty estimates, one of which 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…
Market impact has become a subject of increasing concern among academics and industry experts. We put forward a price impact model which considers the heteroscedasticity of price in the time dimension and dependency between permanent impact…
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…
Alpha signals for statistical arbitrage strategies are often driven by latent factors. This paper analyses how to optimally trade with latent factors that cause prices to jump and diffuse. Moreover, we account for the effect of the trader's…
Value adjustment of uncollateralized trades is determined within a risk-neutral pricing framework. When hedging such trades, investors cannot freely trade protection on their own name, thus facing an incomplete market. This fact is…
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…
The computation of equilibrium prices at which the supply of goods matches their demand typically relies on complete information on agents' private attributes, e.g., suppliers' cost functions, which are often unavailable in practice.…