12,620 research outputs found

    Optimization of Trading Physics Models of Markets

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    We describe an end-to-end real-time S&P futures trading system. Inner-shell stochastic nonlinear dynamic models are developed, and Canonical Momenta Indicators (CMI) are derived from a fitted Lagrangian used by outer-shell trading models dependent on these indicators. Recursive and adaptive optimization using Adaptive Simulated Annealing (ASA) is used for fitting parameters shared across these shells of dynamic and trading models

    The Futility of Utility: how market dynamics marginalize Adam Smith

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    Econometrics is based on the nonempiric notion of utility. Prices, dynamics, and market equilibria are supposed to be derived from utility. Utility is usually treated by economists as a price potential, other times utility rates are treated as Lagrangians. Assumptions of integrability of Lagrangians and dynamics are implicitly and uncritically made. In particular, economists assume that price is the gradient of utility in equilibrium, but I show that price as the gradient of utility is an integrability condition for the Hamiltonian dynamics of an optimization problem in econometric control theory. One consequence is that, in a nonintegrable dynamical system, price cannot be expressed as a function of demand or supply variables. Another consequence is that utility maximization does not describe equiulibrium. I point out that the maximization of Gibbs entropy would describe equilibrium, if equilibrium could be achieved, but equilibrium does not describe real markets. To emphasize the inconsistency of the economists' notion of 'equilibrium', I discuss both deterministic and stochastic dynamics of excess demand and observe that Adam Smith's stabilizing hand is not to be found either in deterministic or stochastic dynamical models of markets, nor in the observed motions of asset prices. Evidence for stability of prices of assets in free markets simply has not been found.Comment: 46 pages. accepte

    Turnover, account value and diversification of real traders: evidence of collective portfolio optimizing behavior

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    Despite the availability of very detailed data on financial market, agent-based modeling is hindered by the lack of information about real trader behavior. This makes it impossible to validate agent-based models, which are thus reverse-engineering attempts. This work is a contribution to the building of a set of stylized facts about the traders themselves. Using the client database of Swissquote Bank SA, the largest on-line Swiss broker, we find empirical relationships between turnover, account values and the number of assets in which a trader is invested. A theory based on simple mean-variance portfolio optimization that crucially includes variable transaction costs is able to reproduce faithfully the observed behaviors. We finally argue that our results bring into light the collective ability of a population to construct a mean-variance portfolio that takes into account the structure of transaction costsComment: 26 pages, 9 figures, Fig. 8 fixe

    Optimized Energy Management Strategy for Wind Plants with Storage in Energy and Reserve Markets

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    This paper addresses the joint operation of wind plants with energy storage systemsin multiple markets to increase the value of wind energy from an economic and technical point of view. The development of an optimized energy management allows scheduling the wind generation in energymarkets, as well as contributing to the system stability through the joint participation in frequency ancillary services. The market optimization maximizes market revenuesconsidering overallstoragecosts, while avoidingenergy imbalancesand market penalties. Moreover, wind power fluctuations, forecast errors and real-time reserverequirementsare controlledby the energy storagesystem and managed afterward through the participation in continuous intraday market. Furthermore, model predictive control approach enables a high compliance of reserve requirementsand a hugereduction of energy imbalancesin real-time operation. Different energy storagecapacities are selected in order to evaluate theircost-effectiveness enhancing the wind plant operation underthe considered study case.This work was partially supported by the Basque Government under Project Road2DC (ELKARTEK Research Program KK-2018/00083)

    Fractal Profit Landscape of the Stock Market

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    We investigate the structure of the profit landscape obtained from the most basic, fluctuation based, trading strategy applied for the daily stock price data. The strategy is parameterized by only two variables, p and q. Stocks are sold and bought if the log return is bigger than p and less than -q, respectively. Repetition of this simple strategy for a long time gives the profit defined in the underlying two-dimensional parameter space of p and q. It is revealed that the local maxima in the profit landscape are spread in the form of a fractal structure. The fractal structure implies that successful strategies are not localized to any region of the profit landscape and are neither spaced evenly throughout the profit landscape, which makes the optimization notoriously hard and hypersensitive for partial or limited information. The concrete implication of this property is demonstrated by showing that optimization of one stock for future values or other stocks renders worse profit than a strategy that ignores fluctuations, i.e., a long-term buy-and-hold strategy.Comment: 12 pages, 4 figure

    Introduction to the special issue on neural networks in financial engineering

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    There are several phases that an emerging field goes through before it reaches maturity, and computational finance is no exception. There is usually a trigger for the birth of the field. In our case, new techniques such as neural networks, significant progress in computing technology, and the need for results that rely on more realistic assumptions inspired new researchers to revisit the traditional problems of finance, problems that have often been tackled by introducing simplifying assumptions in the past. The result has been a wealth of new approaches to these time-honored problems, with significant improvements in many cases

    WARNING: Physics Envy May Be Hazardous To Your Wealth!

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    The quantitative aspirations of economists and financial analysts have for many years been based on the belief that it should be possible to build models of economic systems - and financial markets in particular - that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, "physics envy" has also created a false sense of mathematical precision in some cases. We speculate on the origins of physics envy, and then describe an alternate perspective of economic behavior based on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two concrete examples: the classical harmonic oscillator with some new twists that make physics look more like economics, and a quantitative equity market-neutral strategy. We conclude by offering a new interpretation of tail events, proposing an "uncertainty checklist" with which our taxonomy can be implemented, and considering the role that quants played in the current financial crisis.Comment: v3 adds 2 reference
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