Related papers: Information-Theoretic Approach to Financial Market…
We propose a simple market model where agents trade different types of products with each other by using money, relying only on local information. Value fluctuations of single products, combined with the condition of maximum profit in…
We consider optimal investment problems for a diffusion market model with non-observable random drifts that evolve as an Ito's process. Admissible strategies do not use direct observations of the market parameters, but rather use historical…
We conduct a preliminary analysis of a pairs trading strategy using the Ornstein-Uhlenbeck (OU) process to model stock price spreads. We compare this approach to a naive pairs trading strategy that uses a rolling window to calculate mean…
During the last decade Levy processes with jumps have received increasing popularity for modelling market behaviour for both derviative pricing and risk management purposes. Chan et al. (2009) introduced the use of empirical likelihood…
Understanding the mutual relationships between information flows and social activity in society today is one of the cornerstones of the social sciences. In financial economics, the key issue in this regard is understanding and quantifying…
Standard information theory says nothing about how much meaning is conveyed by a message. We fill this gap with a rigorously justifiable, quantitative definition of ``pragmatic information'', the amount of meaning in a message relevant to a…
Agent-based modeling is a powerful simulation technique to understand the collective behavior and microscopic interaction in complex financial systems. Recently, the concept for determining the key parameters of the agent-based models from…
Information theory is a practical and theoretical framework developed for the study of communication over noisy channels. Its probabilistic basis and capacity to relate statistical structure to function make it ideally suited for studying…
A property of data which is common across a wide range of instruments, markets and time periods is known as stylized empirical fact in the financial statistics literature. This paper first presents a wide range of stylized facts studied in…
In this paper we introduce a class of information-based models for the pricing of fixed-income securities. We consider a set of continuous- time information processes that describe the flow of information about market factors in a monetary…
Starting from the Avellaneda-Stoikov framework, we consider a market maker who wants to optimally set bid/ask quotes over a finite time horizon, to maximize her expected utility. The intensities of the orders she receives depend not only on…
We describe a simple model for speculative trading based on adaptive behavior of economic agents.The adaptive behavior is expressed through a feedback mechanism for changing agents' stock-to-bond ratios, depending on the past performance of…
The financial market is nonpredictable, as according to the Bachelier, the mathematical expectation of the speculator is zero. Nevertheless, we observe in the price fluctuations the two distinct scales, short and long time. Behaviour of a…
In this article we propose a study of market models starting from a set of axioms, as one does in the case of risk measures. We define a market model simply as a mapping from the set of adapted strategies to the set of random variables…
There are two possible ways of interpreting the seemingly stochastic nature of financial markets: the Efficient Market Hypothesis (EMH) and a set of stylized facts that drive the behavior of the markets. We show evidence for some of the…
A new framework for asset pricing based on modelling the information available to market participants is presented. Each asset is characterised by the cash flows it generates. Each cash flow is expressed as a function of one or more…
Model averaging is a useful and robust method for dealing with model uncertainty in statistical analysis. Often, it is useful to consider data subset selection at the same time, in which model selection criteria are used to compare models…
By employing the technique of enlargement of filtrations, we demonstrate how to incorporate information about the future trend of the stochastic interest rate process into a financial model. By modeling the interest rate as an affine…
Motivated by empirical observations on the interplay of trends and reversion, a lattice gas model of financial markets is presented. The shares of an asset are modeled by gas molecules that are distributed across a hidden social network of…
In a very simple stock market, made by only two \emph{initially equivalent} traders, we discuss how the information can affect the performance of the traders. More in detail, we first consider how the portfolios of the traders evolve in…