Related papers: The Cost of Misspecifying Price Impact

The imbalance costs incurred by a stochastic power producer due to forecast production errors have a significant impact on its total profit and therefore, such an impact needs to be taken into account when evaluating investment decisions.…

Investors try to predict returns of financial assets to make successful investment. Many quantitative analysts have used machine learning-based methods to find unknown profitable market rules from large amounts of market data. However,…

An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general…

We study probabilistic prediction games when the underlying model is misspecified, investigating the consequences of predicting using an incorrect parametric model. We show that for a broad class of loss functions and parametric families of…

Financial event studies, ubiquitous in finance research, typically use linear factor models with known factors to estimate abnormal returns and identify causal effects of information events. This paper demonstrates that when factor models…

This paper presents a stochastic model for discrete-time trading in financial markets where trading costs are given by convex cost functions and portfolios are constrained by convex sets. The model does not assume the existence of a cash…

We analyze a proprietary dataset of trades by a single asset manager, comparing their price impact with that of the trades of the rest of the market. In the context of a linear propagator model we find no significant difference between the…

Machine learning algorithms are increasingly employed to price or value homes for sale, properties for rent, rides for hire, and various other goods and services. Machine learning-based prices are typically generated by complex algorithms…

In the context of nonlinear prices, the empirical evidence suggests that the consumers have cognitive biases represented in a limited understanding of nonlinear price structures, and they respond to some alternative perceptions of the…

In this paper, we examine the biases that arise when firms run A/B tests on continuous parameters to estimate global treatment effects on performance metrics of interest; we particularly focus on price experiments to measure the price…

We empirically study the market impact of trading orders. We are specifically interested in large trading orders that are executed incrementally, which we call hidden orders. These are reconstructed based on information about market member…

We study information elicitation in cost-function-based combinatorial prediction markets when the market maker's utility for information decreases over time. In the sudden revelation setting, it is known that some piece of information will…

We introduce an autoregressive-type model of prices in financial market taking into account the self-modulation effect. We find that traders are mainly using strategies with weighted feedbacks of past prices. These feedbacks are responsible…

Providing a measure of market risk is an important issue for investors and financial institutions. However, the existing models for this purpose are per definition symmetric. The current paper introduces an asymmetric capital asset pricing…

Most cost-benefit analyses assume that the estimates of costs and benefits are more or less accurate and unbiased. But what if, in reality, estimates are highly inaccurate and biased? Then the assumption that cost-benefit analysis is a…

We study the problem of the optimal execution of a large trade in the presence of nonlinear transient impact. We propose an approach based on homotopy analysis, whereby a well behaved initial strategy is continuously deformed to lower the…

The effect of proportional transaction costs on systematically generated portfolios is studied empirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio,…

Optimal execution of a portfolio have been a challenging problem for institutional investors. Traders face the trade-off between average trading price and uncertainty, and traditional methods suffer from the curse of dimensionality. Here,…

We study how trading costs are reflected in equilibrium returns. To this end, we develop a tractable continuous-time risk-sharing model, where heterogeneous mean-variance investors trade subject to a quadratic transaction cost. The…

Transaction costs appear in financial markets in more than one form. There are several results in the literature on small proportional transaction cost and not that many on fixed transaction cost. In the present work, we heuristically study…