Related papers: Financial markets as adaptative ecosystems
Reliable calculations of financial risk require that the fat-tailed nature of prices changes is included in risk measures. To this end, a non-Gaussian approach to financial risk management is presented, modeling the power-law tails of the…
High frequency data in finance have led to a deeper understanding on probability distributions of market prices. Several facts seem to be well stablished by empirical evidence. Specifically, probability distributions have the following…
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 present our Agent-Based Market Microstructure Simulation (ABMMS), an Agent-Based Financial Market (ABFM) that captures much of the complexity present in the US National Market System for equities (NMS). Agent-Based models are a natural…
In this article we revisit the classic problem of tatonnement in price formation from a microstructure point of view, reviewing a recent body of theoretical and empirical work explaining how fluctuations in supply and demand are slowly…
We introduce a framework to study the effective objectives at different time scales of financial market microstructure. The financial market can be regarded as a complex adaptive system, where purposeful agents collectively and…
Based on criteria of mathematical simplicity and consistency with empirical market data, a stochastic volatility model is constructed, the volatility process being driven by fractional noise. Price return statistics and asymptotic behavior…
We investigate the relation between the fair price for European-style vanilla options and the distribution of short-term returns on the underlying asset ignoring transaction and other costs. We compute the risk-neutral probability density…
We consider arbitrage free valuation of European options in Black-Scholes and Merton markets, where the general structure of the market is known, however the specific parameters are not known. In order to reflect this subjective uncertainty…
We analyze the performance of RiskMetrics, a widely used methodology for measuring market risk. Based on the assumption of normally distributed returns, the RiskMetrics model completely ignores the presence of fat tails in the distribution…
Most finance studies are discussed on the basis of several hypotheses, for example, investors rationally optimize their investment strategies. However, the hypotheses themselves are sometimes criticized. Market impacts, where trades of…
One of the most interesting problems discerned when applying the Black--Scholes model to financial derivatives, is reconciling the deviation between expected and observed values. In our recent work, we derived a new model based on the…
We consider models of financial markets in which all parties involved find incentives to participate. Strategies are evaluated directly by their virtual wealths. By tuning the price sensitivity and market impact, a phase diagram with…
The Efficient Market Hypothesis has been a staple of economics research for decades. In particular, weak-form market efficiency -- the notion that past prices cannot predict future performance -- is strongly supported by econometric…
Financial and gambling markets are ostensibly similar and hence strategies from one could potentially be applied to the other. Financial markets have been extensively studied, resulting in numerous theorems and models, while gambling…
An analysis of the stylized facts in financial time series is carried out. We find that, instead of the heavy tails in asset return distributions, the slow decay behaviour in autocorrelation functions of absolute returns is actually…
We assume the market price to diffuse in a hierarchical comb of barriers, the heights of which represent the importance of new information entering the market. We find fat tails with the desired exponent for the price change distribution,…
We study the most famous example of a large financial market: the Arbitrage Pricing Model, where investors can trade in a one-period setting with countably many assets admitting a factor structure. We consider the problem of maximising…
Many studies assume stock prices follow a random process known as geometric Brownian motion. Although approximately correct, this model fails to explain the frequent occurrence of extreme price movements, such as stock market crashes. Using…
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…