Computer trading and systemic risk: a nuclear perspective

Financial markets have evolved to become complex adaptive systems highly reliant on the communication speeds and processing power afforded by digital systems. Their failure could cause severe disruption to the provision of financial services and possibly the wider economy. In this study we consider whether a perspective from the nuclear industry can provide additional insights

A Review of the Role of Causality in Developing Trustworthy AI Systems

State-of-the-art AI models largely lack an understanding of the cause-effect relationship that governs human understanding of the real world. Consequently, these models do not generalize to unseen data, often produce unfair results, and are difficult to interpret. This has led to efforts to improve the trustworthiness aspects of AI models. Recently, causal modeling and inference methods have emerged as powerful tools. This review aims to provide the reader with an overview of causal methods that have been developed to improve the trustworthiness of AI models. We hope that our contribution will motivate future research on causality-based solutions for trustworthy AI.Comment: 55 pages, 8 figures. Under revie

Implementation of DSP-based algorithms on USRP for mitigating non-linear distortions in the receiver

In recent years, software-defined radio (SDR) has attracted increasingly more attention in regards to modern communication systems. The concept of SDR defines a radio device that is capable of flexibly reconfiguring its radio interface by software. This opens multiple fields of application and makes SDR an enormously adjustable and versatile radio technology. However, RF impairments induced by cheap and simple RF front-ends turn out to be a significant limitation in practice. Non-linear distortions emerge from non-linear components of the direct down-conversion chain that are driven into their saturation level. This is a result of a finite linearity and limited dynamic range of the RF frontend. The focus of this thesis are non-linear distortions in wideband receivers and a mitigation of them by means of digital signal processing. The idea is to artificially regenerate the non-linear distortions in the digital domain by applying a memoryless, polynomial model. An adaptive filter adjusts these reference distortions in their magnitude and phase and subtracts them from the distorted signal. A hardware implementation of a mitigation algorithm on a typical SDR-platform is presented. No prior implementation of this pure-digital approach is known. An implementation design flow is described following a top-down approach, starting from a fixed-point high-level implementation and ending up with a low-level hardware description language implementation. Both high-level and low-level simulations help to validate and evaluate the implementation. In conclusion, the implementation of the mitigation algorithm is a sophisticated mitigation technique for cleaning a down-converted baseband spectrum of non-linear distortions in real-time. Therefore, the effective linearity of the RF front-end is increased. This may lead to a significant improvement in the bit error rate performance of cleansed modulated signals, as well as to an enhanced sensing reliability in the context of cognitive radio.Zusammenfassung: In den letzten Jahren sorgte Software-Defined Radio (SDR) in Bezug auf moderne Kommunikationssysteme für immer größere Aufmerksamkeit. Das Konzept von SDR bezeichnet ein Funkgerät, das in der Lage ist, seine Funkschnittstelle durch Software flexibel zu rekonfigurieren. Dies ermöglicht eine Vielzahl von Anwendungsmöglichkeiten und macht SDR zu einer enorm anpassungsfähigen und vielseitigen Funktechnologie. Allerdings stellen im HF-Frontend ausgelöste Störungen in der Praxis eine erhebliche Einschränkung dar. In direkt umsetzenden Empfängerstrukturen entstehen durch nichtlineare Komponenten, die in ihren Sättigungsbereich getrieben werden, nichtlineare Verzerrungen. Das ist ein Ergebnis der begrenzten Linearität und des Dynamikbereich des HF-Frontends eingeschränkt sind. Der Fokus der Arbeit liegt auf nichtlinearen Verzerrungen in breitbandigen Empfängern und deren Minderung mit Hilfe von digitaler Signalverarbeitung. Die Idee ist, die nichtlinearen Verzerrungen im digitalen Bereich auf Basis eines gedächtnislosen, Polynom-Modells zu regenerieren. Ein adaptives Filter passt dabei den Betrag der nichtlinearen Referenzverzerrungen an und subtrahiert diese vom verzerrten Signal. In der Arbeit wird eine Hardwareimplementierung eines Störungsminderungsalgorithmus auf einer typischen SDR Plattform vorgestellt. Bisher ist keine Implementierung des rein-digitalen Ansatzes bekannt. Der Implementierungsablauf beschreibt anhand eines Top-Bottom-Ansatzes, wie der Algorithmus zuerst in einer Festpunkt High-Level Realisierung und schließlich in einer Low-Level Implementierung mit einer Hardwarebeschreibungssprache umgesetzt wird. Sowohl High-Level als auch Low-Level Simulationen unterstützen dabei die Validierung und Bewertung der Implementierung. Die Implementierung des Abschwächungsalgorithmus stellt schließlich eine ausgefeilte Methode dar, um ein heruntergeschmischtes Basisbandspektrum in Echtzeit von nichtlinearen Verzerrungen zu befreien. Demzufolge wird die effektive Linearität des HF-Frontends erhöht. Dies kann zu einer erheblichen Verbesserung der Bitfehlerrate von modulierten Signalen führen sowie die Zuverlässigkeit des Sensings in Bezug auf kognitiven Funk steigern.Ilmenau, Techn. Univ., Masterarbeit, 201

A Network Model of Financial Markets

This thesis introduces a network representation of equity markets.The model is based on the premise that assets share dependencies on abstract ‘factors’ resulting in exploitable patterns among asset price levels.The network model is a collection of long-run market trends estimated by a 3 layer machine learning framework.The network model’s comprehensive validity is established with 2 simulations in the fields of algorithmic trading, and systemic risk.The algorithmic trading validation applies expectations derived from the network model to estimating expected future returns. It further utilizes the network’s expectations to actively manage a theoretically market neutral portfolio.The validation demonstrates that the network model’s portfolio generates excess returns relative to 2 benchmarks. Over the time period of April, 2007 to January, 2014 the network model’s portfolio for assets drawn from the S&P/ASX 100 produced a Sharpe ratio of 0.674.This approximately doubles the nearest benchmark. The systemic risk validation utilized the network model to simulate shocks to select market sectors and evaluate the resulting financial contagion.The validation successfully differentiated sectors by systemic connectivity levels and suggested some interesting market features. Most notable was the identification of the ‘Financials’ sector as most systemically influential and ‘Basic Materials’ as the most systemically dependent. Additionally, there was evidence that ‘Financials’ may function as a hub of systemic risk which exacerbates losses from multiple market sectors

Elasto-plastic deformations within a material point framework on modern GPU architectures

Plastic strain localization is an important process on Earth. It strongly influ- ences the mechanical behaviour of natural processes, such as fault mechanics, earthquakes or orogeny. At a smaller scale, a landslide is a fantastic example of elasto-plastic deformations. Such behaviour spans from pre-failure mech- anisms to post-failure propagation of the unstable material. To fully resolve the landslide mechanics, the selected numerical methods should be able to efficiently address a wide range of deformation magnitudes. Accurate and performant numerical modelling requires important compu- tational resources. Mesh-free numerical methods such as the material point method (MPM) or the smoothed-particle hydrodynamics (SPH) are particu- larly computationally expensive, when compared with mesh-based methods, such as the finite element method (FEM) or the finite difference method (FDM). Still, mesh-free methods are particularly well-suited to numerical problems involving large elasto-plastic deformations. But, the computational efficiency of these methods should be first improved in order to tackle complex three-dimensional problems, i.e., landslides. As such, this research work attempts to alleviate the computational cost of the material point method by using the most recent graphics processing unit (GPU) architectures available. GPUs are many-core processors originally designed to refresh screen pixels (e.g., for computer games) independently. This allows GPUs to delivers a massive parallelism when compared to central processing units (CPUs). To do so, this research work first investigates code prototyping in a high- level language, e.g., MATLAB. This allows to implement vectorized algorithms and benchmark numerical results of two-dimensional analysis with analytical solutions and/or experimental results in an affordable amount of time. After- wards, low-level language such as CUDA C is used to efficiently implement a GPU-based solver, i.e., ep2-3De v1.0, can resolve three-dimensional prob- lems in a decent amount of time. This part takes advantages of the massive parallelism of modern GPU architectures. In addition, a first attempt of GPU parallel computing, i.e., multi-GPU codes, is performed to increase even more the performance and to address the on-chip memory limitation. Finally, this GPU-based solver is used to investigate three-dimensional granular collapses and is compared with experimental evidences obtained in the laboratory. This research work demonstrates that the material point method is well suited to resolve small to large elasto-plastic deformations. Moreover, the computational efficiency of the method can be dramatically increased using modern GPU architectures. These allow fast, performant and accurate three- dimensional modelling of landslides, provided that the on-chip memory limi- tation is alleviated with an appropriate parallel strategy

Systematic Trading: Calibration Advances through Machine Learning

Systematic trading in finance uses computer models to define trade goals, risk controls and rules that can execute trade orders in a methodical way. This thesis investigates how performance in systematic trading can be crucially enhanced by both i) persistently reducing the bid-offer spread quoted by the trader through optimized and realistically backtested strategies and ii) improving the out-of-sample robustness of the strategy selected through the injection of theory into the typically data-driven calibration processes. While doing so it brings to the foreground sound scientific reasons that, for the first time to my knowledge, technically underpin popular academic observations about the recent nature of the financial markets. The thesis conducts consecutive experiments across strategies within the three important building blocks of systematic trading: a) execution, b) quoting and c) risk-reward allowing me to progressively generate more complex and accurate backtested scenarios as recently demanded in the literature (Cahan et al. (2010)). The three experiments conducted are: 1. Execution: an execution model based on support vector machines. The first experiment is deployed to improve the realism of the other two. It analyses a popular model of execution: the volume weighted average price (VWAP). The VWAP algorithm targets to split the size of an order along the trading session according to the expected intraday volume's profile since the activity in the markets typically resembles convex seasonality – with more activity around the open and the closing auctions than along the rest of the day. In doing so, the main challenge is to provide the model with a reasonable expected profile. After proving in my data sample that two simple static approaches to the profile overcome the PCA-ARMA from Bialkowski et al. (2008) (a popular two-fold model composed by a dynamic component around an unsupervised learning structure) a further combination of both through an index based on supervised learning is proposed. The Sample Sensitivity Index hence successfully allows estimating the expected volume's profile more accurately by selecting those ranges of time where the model shall be less sensitive to past data through the identification of patterns via support vector machines. Only once the intraday execution risk has been defined can the quoting policy of a mid-frequency (in general, up to a week) hedging strategy be accurately analysed. 2. Quoting: a quoting model built upon particle swarm optimization. The second experiment analyses for the first time to my knowledge how to achieve the disruptive 50% bid-offer spread discount observed in Menkveld (2013) without increasing the risk profile of a trading agent. The experiment depends crucially on a series of variables of which market impact and slippage are typically the most difficult to estimate. By adapting the market impact model in Almgren et al. (2005) to the VWAP developed in the previous experiment and by estimating its slippage through its errors' distribution a framework within which the bid-offer spread can be assessed is generated. First, a full-replication spread, (that set out following the strict definition of a product in order to hedge it completely) is calculated and fixed as a benchmark. Then, by allowing benefiting from a lower market impact at the cost of assuming deviation risk (tracking error and tail risk) a non-full-replication spread is calibrated through particle swarm optimization (PSO) as in Diez et al. (2012) and compared with the benchmark. Finally, it is shown that the latter can reach a discount of a 50% with respect to the benchmark if a certain number of trades is granted. This typically occurs on the most liquid securities. This result not only underpins Menkveld's observations but also points out that there is room for further reductions. When seeking additional performance, once the quoting policy has been defined, a further layer with a calibrated risk-reward policy shall be deployed. 3. Risk-Reward: a calibration model defined within a Q-learning framework. The third experiment analyses how the calibration process of a risk-reward policy can be enhanced to achieve a more robust out-of-sample performance – a cornerstone in quantitative trading. It successfully gives a response to the literature that recently focusses on the detrimental role of overfitting (Bailey et al. (2013a)). The experiment was motivated by the assumption that the techniques underpinned by financial theory shall show a better behaviour (a lower deviation between in-sample and out-of-sample performance) than the classical data-driven only processes. As such, both approaches are compared within a framework of active trading upon a novel indicator. The indicator, called the Expectations' Shift, is rooted on the expectations of the markets' evolution embedded in the dynamics of the prices. The crucial challenge of the experiment is the injection of theory within the calibration process. This is achieved through the usage of reinforcement learning (RL). RL is an area of ML inspired by behaviourist psychology concerned with how software agents take decisions in an specific environment incentivised by a policy of rewards. By analysing the Q-learning matrix that collects the set of state/actions learnt by the agent within the environment, defined by each combination of parameters considered within the calibration universe, the rationale that an autonomous agent would have learnt in terms of risk management can be generated. Finally, by then selecting the combination of parameters whose attached rationale is closest to that of the portfolio manager a data-driven solution that converges to the theory-driven solution can be found and this is shown to successfully outperform out-of-sample the classical approaches followed in Finance. The thesis contributes to science by addressing what techniques could underpin recent academic findings about the nature of the trading industry for which a scientific explanation was not yet given: • A novel agent-based approach that allows for a robust out-of-sampkle performance by crucially providing the trader with a way to inject financial insights into the generally data-driven only calibration processes. It this way benefits from surpassing the generic model limitations present in the literature (Bailey et al. (2013b), Schorfheid and Wolpin (2012), Van Belle and Kerr (2012) or Weiss and Kulikowski (1991)) by finding a point where theory-driven patterns (the trader's priors tend to enhance out-of-sample robustness) merge with data-driven ones (those that allow to exploit latent information). • The provision of a technique that, to the best of my knowledge, explains for the first time how to reduce the bid-offer spread quoted by a traditional trader without modifying her risk appetite. A reduction not previously addressed in the literature in spite of the fact that the increasing regulation against the assumption of risk by market makers (e.g. Dodd–Frank Wall Street Reform and Consumer Protection Act) does yet coincide with the aggressive discounts observed by Menkveld (2013). As a result, this thesis could further contribute to science by serving as a framework to conduct future analyses in the context of systematic trading. • The completion of a mid-frequency trading experiment with high frequency execution information. It is shown how the latter can have a significant effect on the former not only through the erosion of its performance but, more subtly, by changing its entire strategic design (both, optimal composition and parameterization). This tends to be highly disregarded by the financial literature. More importantly, the methodologies disclosed herein have been crucial to underpin the setup of a new unit in the industry, BBVA's Global Strategies & Data Science. This disruptive, global and cross-asset team gives an enhanced role to science by successfully becoming the main responsible for the risk management of the Bank's strategies both in electronic trading and electronic commerce. Other contributions include: the provision of a novel risk measure (flowVaR); the proposal of a novel trading indicator (Expectations’ Shift); and the definition of a novel index that allows to improve the estimation of the intraday volume’s profile (Sample Sensitivity Index)

Automatic static analysis of software performance

Performance is a critical component of software quality. Software performance can have drastic repercussions on an application, frustrating its users, breaking the functionality of its components, or even rendering it defenseless against hackers. Unfortunately, unlike in the program verification domain, robust analysis techniques for software performance are almost non-existent. In this thesis we formalize important classes of performance-related bugs and security vulnerabilities, and implement novel static analysis techniques for automatically detecting them in widely used open-source applications. Our tools are able to uncover 92 performance bugs and 47 security vulnerabilities, while analyzing hundreds of thousands of lines of code and reporting a modest amount of false positives. Our work opens a new avenue for research: the development of rigorous automatic analyses for effective software performance understanding, inspired by traditional research in functional verification.Computer Science

New Design Techniques for Dynamic Reconfigurable Architectures

L'abstract è presente nell'allegato / the abstract is in the attachmen