Related papers: Beta-Dependent Gamma Feedback and Endogenous Volat…
We review the evidence that the erratic dynamics of markets is to a large extent of endogenous origin, i.e. determined by the trading activity itself and not due to the rational processing of exogenous news. In order to understand why and…
We provide a general probabilistic framework within which we establish scaling limits for a class of continuous-time stochastic volatility models with self-exciting jump dynamics. In the scaling limit, the joint dynamics of asset returns…
We present a reactive beta model that includes the leverage effect to allow hedge fund managers to target a near-zero beta for market neutral strategies. For this purpose, we derive a metric of correlation with leverage effect to identify…
This paper proposes a simple and parsimonious discrete-time simulation model to describe the endogenous formation and periodic collapse of financial bubbles. While existing literature has extensively explored the statistical properties of…
The cryptocurrency market is volatile, non-stationary and non-continuous. Together with liquid derivatives markets, this poses a unique opportunity to study risk management, especially the hedging of options, in a turbulent market. We study…
We present a model that investigates the spontaneous emergence of randomness in equity market microstructure. The phase space analysis of our model exposes an endogenous source of fluctuation in price and volume. We formulate a control…
In this paper we explain the wild fluctuations of financial prices from the intrinsic amplifying feedback of speculative supply and demand. Formally, we show that an asset return follows a multiplicative random growth with exogenous input,…
The dynamics of a stock market with heterogeneous agents is discussed in the framework of a recently proposed spin model for the emergence of bubbles and crashes. We relate the log returns of stock prices to magnetization in the model and…
We focus on the influence of external sources of information upon financial markets. In particular, we develop a stochastic agent-based market model characterized by a certain herding behavior as well as allowing traders to be influenced by…
We examine dynamic coupling and feedback effects between High Frequency Traders (HFTs) and how they can destabilize markets. We develop a general framework for modelling dynamic interaction based on recurrence relations, and use this to…
This paper proposes a theory of stock market predictability patterns based on a model of heterogeneous beliefs. In a discrete finite time framework, some agents receive news about an asset's fundamental value through a noisy signal. The…
We develop a theoretical trading conditioning model subject to price volatility and return information in terms of market psychological behavior, based on analytical transaction volume-price probability wave distributions in which we use…
Agent-based models help explain stock price dynamics as emergent phenomena driven by interacting investors. In this modeling tradition, investor behavior has typically been captured by two distinct mechanisms -- learning and heterogeneous…
We study option pricing and hedging with uncertainty about a Black-Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this…
We present a simple agent-based model to study the development of a bubble and the consequential crash and investigate how their proximate triggering factor might relate to their fundamental mechanism, and vice versa. Our agents invest…
According to the volatility feedback effect, an unexpected increase in squared volatility leads to an immediate decline in the price-dividend ratio. In this paper, we consider the properties of stock price dynamics and option valuations…
Empirical data reveals that the liquidity flow into the order book (depositions, cancellations andmarket orders) is influenced by past price changes. In particular, we show that liquidity tends todecrease with the amplitude of past…
Price-mediated contagion occurs when a positive feedback loop develops following a drop in asset prices which forces banks and other financial institutions to sell their holdings. Prior studies of such events fix the level of market…
We introduce a stochastic heterogeneous interacting-agent model for the short-time non-equilibrium evolution of excess demand and price in a stylized asset market. We consider a combination of social interaction within peer groups and…
In a market with a rough or Markovian mean-reverting stochastic volatility there is no perfect hedge. Here it is shown how various delta-type hedging strategies perform and can be evaluated in such markets in the case of European options. A…