1,199 research outputs found
Credit default swaps and systemic risk
We present a network model for investigating the impact on systemic risk of central clearing of over the counter (OTC) credit default swaps (CDS). We model contingent cash flows resulting from CDS and other OTC derivatives by a multi-layered network with a core-periphery structure, which is flexible enough to reproduce the gross and net exposures as well as the heterogeneity of market shares of participating institutions. We analyze illiquidity cascades resulting from liquidity shocks and show that the contagion of illiquidity takes place along a sub-network constituted by links identified as ’critical receivables’. A key role is played by the long intermediation chains inherent to the structure of the OTC network, which may turn into chains of critical receivables. We calibrate our model to data representing net and gross OTC exposures of large dealer banks and use this model to investigate the impact of central clearing on network stability. We find that, when interest rate swaps are cleared, central clearing of credit default swaps through a well-capitalized CCP can reduce the probability and the magnitude of a systemic illiquidity spiral by reducing the length of the chains of critical receivables within the financial network. These benefits are reduced, however, if some large intermediaries are not included as clearing members
On the support of solutions of stochastic differential equations with path-dependent coefficients
Given a stochastic differential equation with path-dependent coefficients driven by a multidimensional Wiener process, we show that the support of the law of the solution is given by the image of the Cameron-Martin space under the flow of the solutions of a system of path-dependent (ordinary) differential equations. Our result extends the Stroock-Varadhan support theorem for diffusion processes to the case of SDEs with path-dependent coefficients. The proof is based on the Functional Ito calculus and interpolation estimates for stochastic processes in Holder norm
The Price Impact of Order Book Events
We study the price impact of order book events - limit orders, market orders
and cancelations - using the NYSE TAQ data for 50 U.S. stocks. We show that,
over short time intervals, price changes are mainly driven by the order flow
imbalance, defined as the imbalance between supply and demand at the best bid
and ask prices. Our study reveals a linear relation between order flow
imbalance and price changes, with a slope inversely proportional to the market
depth. These results are shown to be robust to seasonality effects, and stable
across time scales and across stocks. We argue that this linear price impact
model, together with a scaling argument, implies the empirically observed
"square-root" relation between price changes and trading volume. However, the
relation between price changes and trade volume is found to be noisy and less
robust than the one based on order flow imbalance
News and price returns from threshold behaviour and vice-versa: exact solution of a simple agent-based market model
Starting from an exact relationship between news, threshold and price return
distributions in the stationary state, I discuss the ability of the
Ghoulmie-Cont-Nadal model of traders to produce fat-tailed price returns. Under
normal conditions, this model is not able to transform Gaussian news into
fat-tailed price returns. When the variance of the news so small that only the
players with zero threshold can possibly react to news, this model produces
Levy-distributed price returns with a -1 exponent. In the special case of
super-linear price impact functions, fat-tailed returns are obtained from
well-behaved news.Comment: 4 pages, 3 figures. This is quite possibly the final version. To
appear in J. Phys
Selection mechanisms affect volatility in evolving markets
Financial asset markets are sociotechnical systems whose constituent agents
are subject to evolutionary pressure as unprofitable agents exit the
marketplace and more profitable agents continue to trade assets. Using a
population of evolving zero-intelligence agents and a frequent batch auction
price-discovery mechanism as substrate, we analyze the role played by
evolutionary selection mechanisms in determining macro-observable market
statistics. In particular, we show that selection mechanisms incorporating a
local fitness-proportionate component are associated with high correlation
between a micro, risk-aversion parameter and a commonly-used macro-volatility
statistic, while a purely quantile-based selection mechanism shows
significantly less correlation.Comment: 9 pages, 7 figures, to appear in proceedings of GECCO 2019 as a full
pape
Engineering Quantum States, Nonlinear Measurements, and Anomalous Diffusion by Imaging
We show that well-separated quantum superposition states, measurements of
strongly nonlinear observables, and quantum dynamics driven by anomalous
diffusion can all be achieved for single atoms or molecules by imaging
spontaneous photons that they emit via resonance florescence. To generate
anomalous diffusion we introduce continuous measurements driven by L\'evy
processes, and prove a number of results regarding their properties. In
particular we present strong evidence that the only stable L\'evy density that
can realize a strictly continuous measurement is the Gaussian.Comment: revtex4-1, 17 pages, 7 eps figure
Regularization independent of the noise level: an analysis of quasi-optimality
The quasi-optimality criterion chooses the regularization parameter in
inverse problems without taking into account the noise level. This rule works
remarkably well in practice, although Bakushinskii has shown that there are
always counterexamples with very poor performance. We propose an average case
analysis of quasi-optimality for spectral cut-off estimators and we prove that
the quasi-optimality criterion determines estimators which are rate-optimal
{\em on average}. Its practical performance is illustrated with a calibration
problem from mathematical finance.Comment: 18 pages, 3 figure
Structurally dynamic spin market networks
The agent-based model of stock price dynamics on a directed evolving complex
network is suggested and studied by direct simulation. The stationary regime is
maintained as a result of the balance between the extremal dynamics, adaptivity
of strategic variables and reconnection rules. The inherent structure of node
agent "brain" is modeled by a recursive neural network with local and global
inputs and feedback connections. For specific parametric combination the
complex network displays small-world phenomenon combined with scale-free
behavior. The identification of a local leader (network hub, agent whose
strategies are frequently adapted by its neighbors) is carried out by repeated
random walk process through network. The simulations show empirically relevant
dynamics of price returns and volatility clustering. The additional emerging
aspects of stylized market statistics are Zipfian distributions of fitness.Comment: 13 pages, 5 figures, accepted in IJMPC, references added, minor
changes in model, new results and modified figure
Time-Changed Poisson Processes
We consider time-changed Poisson processes, and derive the governing
difference-differential equations (DDE) these processes. In particular, we
consider the time-changed Poisson processes where the the time-change is
inverse Gaussian, or its hitting time process, and discuss the governing DDE's.
The stable subordinator, inverse stable subordinator and their iterated
versions are also considered as time-changes. DDE's corresponding to
probability mass functions of these time-changed processes are obtained.
Finally, we obtain a new governing partial differential equation for the
tempered stable subordinator of index when is a rational
number. We then use this result to obtain the governing DDE for the mass
function of Poisson process time-changed by tempered stable subordinator. Our
results extend and complement the results in Baeumer et al. \cite{B-M-N} and
Beghin et al. \cite{BO-1} in several directions.Comment: 18 page
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