Essays in financial economics

This thesis consists of three essays in financial economics. The first chapter analyses the fundraising process in the hedge fund industry and the role financial intermediaries play in this process. Using the SEC form D filings, I document that broker-sold funds underperform directly-sold funds by 2% (1.6%) per year on a risk-adjusted basis before (after) fees. Also directly-sold funds, on average, have larger average investor’s size, larger minimum investment size, and charge higher performance fees comparing to broker-sold ones. Empirical results are consistent with a stylized model of fundraising. I estimate the model implied average broker’s compensation to be $1.5 million per year. The second chapter (co-authored with Albert S. Kyle and Anna A. Obizhaeva) introduces a new structural model of stock returns generating process. The model assumes that stock prices change in response to buy and sell bets arriving to the market place as predicted by market microstructure invariance. These bets are shredded by traders into sequences of transactions according to some bet-shredding algorithms. Arbitrageurs take advantage of any noticeable returns predictability, and market makers clear the market. This structural model is calibrated to match empirical time-series and cross-sectional patterns of higher moments of returns. We calibrate hard-to-observe parameters of bet-shredding using the method of simulated moments, analyse its properties, and show how much shredding has increased over time. The third chapter studies cross-sectional and time series variation in the size of repurchase programs. I find that this variation is explained by the variables motivated by market microstructure invariance theory. My results suggest that when determining the size of repurchase programs, managers may target percentage impact costs of these programs or target inventory levels sufficient to allocate their future bets about their companies

Calibration of optimal execution of financial transactions in the presence of transient market impact

Trading large volumes of a financial asset in order driven markets requires the use of algorithmic execution dividing the volume in many transactions in order to minimize costs due to market impact. A proper design of an optimal execution strategy strongly depends on a careful modeling of market impact, i.e. how the price reacts to trades. In this paper we consider a recently introduced market impact model (Bouchaud et al., 2004), which has the property of describing both the volume and the temporal dependence of price change due to trading. We show how this model can be used to describe price impact also in aggregated trade time or in real time. We then solve analytically and calibrate with real data the optimal execution problem both for risk neutral and for risk averse investors and we derive an efficient frontier of optimal execution. When we include spread costs the problem must be solved numerically and we show that the introduction of such costs regularizes the solution.Comment: 31 pages, 8 figure

Market impact and trading profile of large trading orders in stock markets

We empirically study the market impact of trading orders. We are specifically interested in large trading orders that are executed incrementally, which we call hidden orders. These are reconstructed based on information about market member codes using data from the Spanish Stock Market and the London Stock Exchange. We find that market impact is strongly concave, approximately increasing as the square root of order size. Furthermore, as a given order is executed, the impact grows in time according to a power-law; after the order is finished, it reverts to a level of about 0.5-0.7 of its value at its peak. We observe that hidden orders are executed at a rate that more or less matches trading in the overall market, except for small deviations at the beginning and end of the order.Comment: 9 pages, 7 figure

Drift dependence of optimal trade execution strategies under transient price impact

We give a complete solution to the problem of minimizing the expected liquidity costs in presence of a general drift when the underlying market impact model has linear transient price impact with exponential resilience. It turns out that this problem is well-posed only if the drift is absolutely continuous. Optimal strategies often do not exist, and when they do, they depend strongly on the derivative of the drift. Our approach uses elements from singular stochastic control, even though the problem is essentially non-Markovian due to the transience of price impact and the lack in Markovian structure of the underlying price process. As a corollary, we give a complete solution to the minimization of a certain cost-risk criterion in our setting

КЛИНИКО-ЛАБОРАТОРНЫЙ АНАЛИЗ ЛЕТАЛЬНЫХ СЛУЧАЕВ ТЯЖЕЛОЙ ФОРМЫ ГРИППА А(H1N1) PDM 2009 ЗА ПЕРИОД ЭПИДЕМИИ 2015/2016 ГГ. В САНКТ-ПЕТЕРБУРГЕ

The purpose of our study was to investigate the characteristics of severe form of influenza A (H1N1) pdm 2009 with a fatal outcome, given the comorbidities. Materials and methods. Medical histories of 105 people who died in hospitals of St. Petersburg for the period of the epidemic of 2015/16 served as material for analysis.The lethality caused by the pandemic virus type A/ H1N1 / 2009 pdm was higher in males. Most of the patients had concomitant chronic diseases in the anamnesis. Obesity was observed in 44.8% (47/105) of patients, diabetes mellitus — 28.5% (30/105), isolated heart disease — 19.0% (20/ 105), combined pathology — 48.6% (51/105). In the first biochemical analysis of blood, creatine phosphokinase, lactate dehydrogenase were increased, total protein and prothrombin consumption index were reduced. The patient's death occurred after 5 days of illness in 88.6% cases, in 11.4% — up to 5 days of illness (inclusive). The analysis of fatal cases up to 5 days of a disease and death from complications (2—4 week) didn't find significant differences in the character and frequency of comorbidity. Specific antiviral therapy has been assigned to all patients, but 48 hours later.Bilateral subtotal viral and bacterial pneumonia was identified on the section, in the majority of cases, in 70.5% with hemorrhagic component. 30% patients had cerebral oedema, 41% patients had severe toxic parenchymatouse degeneration of miocardium, liver and kidneys. The pathology of the cardiovascular system, diabetes and obesity worsen the prognosis of the disease. Increased creatine phosphokinase, lactate dehydrogenase, and reduced total protein and prothrombin consumption index can be considered as markers of severe influenza. The ineffectiveness of antiviral therapy due to its late appointment, thus timely initiation of etiotropic treatment is very impotent. Целью нашего исследования было изучение особенностей течения тяжелой формы гриппа А(H1N1) pdm 2009 с летальным исходом у взрослых с учетом преморбидного фона. Материалом для анализа послужили истории болезни 105 человек, умерших в стационарах Санкт-Петербурга за эпидемию 2015/16 гг.Показано, что летальные случаи, обусловленные пандемическим вирусом типа А/Н1N1/ pdm 2009 чаще регистрировались у мужчин. В анамнезе у большей части пациентов были отмечены сопутствующие хронические заболевания. Сочетанная патология — 48,6% (51/105), ожирение — 44,8% (47/105), сахарный диабет — 28,5% (30/105), изолировано сердечно-сосудистая патология — в 19,0% (20/105) случаев. Зарегистрировано значимое повышение креатинфосфокиназы и лактатдегидрогеназы уже при первичном биохимическом анализе крови, а также снижение протромбинового индекса и общего белка. У большей части пациентов смерть наступала после 5 дня болезни (88,6%), у 12 (11,4%) пациентов — до 5 дня болезни (включительно). Достоверных различий между сопутствующей патологией у больных, умерших до 5 дня, и от осложнений (в течение 2—4 недель) не выявлено. На секции выявлялясь в большинстве случаев двусторонняя субтотальная вирусно-бактериальная пневмония, в 70,5% — с геморрагический компонентом, отек головного мозга (30%), тяжелая токсическая паренхиматозная дистрофия миокарда, печени, почек у 43 пациентов (41%). Специфическая противовирусная терапия была назначена всем пациентам, но позже 48 часов.Неблагоприятными факторами, ухудшающими прогноз заболевания, являются: патология сердечно-сосудистой системы, сахарный диабет и ожирение. Повышение ферментов креатинфосфокиназы, лактатдегидрогеназы, а также снижение протромбинового индекса и общего белка можно расценивать как маркеры тяжелого гриппа. Неэффективность противовирусной терапии обусловлена поздним ее назначением, что еще раз подчеркивает важность своевременного начала лечения этиотропными препаратами.

High frequency trading strategies, market fragility and price spikes: an agent based model perspective

Given recent requirements for ensuring the robustness of algorithmic trading strategies laid out in the Markets in Financial Instruments Directive II, this paper proposes a novel agent-based simulation for exploring algorithmic trading strategies. Five different types of agents are present in the market. The statistical properties of the simulated market are compared with equity market depth data from the Chi-X exchange and found to be significantly similar. The model is able to reproduce a number of stylised market properties including: clustered volatility, autocorrelation of returns, long memory in order flow, concave price impact and the presence of extreme price events. The results are found to be insensitive to reasonable parameter variations