Hedging Non-Tradable Risks with Transaction Costs and Price Impact

A risk-averse agent hedges her exposure to a non-tradable risk factor $U$ using a correlated traded asset $S$ and accounts for the impact of her trades on both factors. The effect of the agent's trades on $U$ is referred to as cross-impact. By solving the agent's stochastic control problem, we obtain a closed-form expression for the optimal strategy when the agent holds a linear position in $U$. When the exposure to the non-tradable risk factor $\psi(U_T)$ is non-linear, we provide an approximation to the optimal strategy in closed-form, and prove that the value function is correctly approximated by this strategy when cross-impact and risk-aversion are small. We further prove that when $\psi(U_T)$ is non-linear, the approximate optimal strategy can be written in terms of the optimal strategy for a linear exposure with the size of the position changing dynamically according to the exposure's "Delta" under a particular probability measure.Comment: Originally posted to SSRN April 27, 2018. Forthcoming in Mathematical Financ

Trading Cointegrated Assets with Price Impact

Executing a basket of co-integrated assets is an important task facing investors. Here, we show how to do this accounting for the informational advantage gained from assets within and outside the basket, as well as for the permanent price impact of market orders (MOs) from all market participants, and the temporary impact that the agent's MOs have on prices. The execution problem is posed as an optimal stochastic control problem and we demonstrate that, under some mild conditions, the value function admits a closed-form solution, and prove a verification theorem. Furthermore, we use data of five stocks traded in the Nasdaq exchange to estimate the model parameters and use simulations to illustrate the performance of the strategy. As an example, the agent liquidates a portfolio consisting of shares in Intel Corporation (INTC) and Market Vectors Semiconductor ETF (SMH). We show that including the information provided by three additional assets, FARO Technologies (FARO), NetApp (NTAP) and Oracle Corporation (ORCL), considerably improves the strategy's performance; for the portfolio we execute, it outperforms the multi-asset version of Almgren-Chriss by approximately 4 to 4.5 basis points.Comment: 32 pages,4 figures, 11 tables. First appeared on SSRN Oct 2015 at http://ssrn.com/abstract=268130

Foreign Exchange Markets with Last Look

We examine the Foreign Exchange (FX) spot price spreads with and without Last Look on the transaction. We assume that brokers are risk-neutral and they quote spreads so that losses to latency arbitrageurs (LAs) are recovered from other traders in the FX market. These losses are reduced if the broker can reject, ex-post, loss-making trades by enforcing the Last Look option which is a feature of some trading venues in FX markets. For a given rejection threshold the risk-neutral broker quotes a spread to the market so that her expected profits are zero. When there is only one venue, we find that the Last Look option reduces quoted spreads. If there are two venues we show that the market reaches an equilibrium where traders have no incentive to migrate. The equilibrium can be reached with both venues coexisting, or with only one venue surviving. Moreover, when one venue enforces Last Look and the other one does not, counterintuitively, it may be the case that the Last Look venue quotes larger spreads.Comment: 40 pages, 7 figure

A multi-group SEIRA model for the spread of COVID-19 among heterogeneous populations

The outbreak and propagation of COVID-19 have posed a considerable challenge to modern society. In particular, the different restrictive actions taken by governments to prevent the spread of the virus have changed the way humans interact and conceive interaction. Due to geographical, behavioral, or economic factors, different sub-groups among a population are more (or less) likely to interact, and thus to spread/acquire the virus. In this work, we present a general multi-group SEIRA model for representing the spread of COVID-19 among a heterogeneous population and test it in a numerical case of study. By highlighting its applicability and the ease with which its general formulation can be adapted to particular studies, we expect our model to lead us to a better understanding of the evolution of this pandemic and to better public-health policies to control it

Effect of the Wake of the Transducer Supports on the Ultrasonic Anemometer Measurements

The wake produced by the structural supports of the ultrasonic anemometers (UAs)causes distortions in the velocity field in the vicinity of the sonic path. These distortions are measured by the UA, inducing errors in the determination of the mean velocity, turbulence intensity, spectrum, etc.; basic parameters to determine the effect of wind on structures. Additionally, these distortions can lead to indefinition in the calibration function of the sensors (Cuerva et al., 2004). Several wind tunnel tests have been dedicated to obtaining experimental data, from which have been developed fit models to describe and to correct these distortions (Kaimal, 1978 and Wyngaard, 1985). This work explores the effect of a vortex wake generated by the supports of an UA, on the measurement of wind speed done by this instrument. To do this, the Von Karman¿s vortex street potential model is combined with the mathematical model of the measuring process carried out by UAs developed by Franchini et al. (2007). The obtained results are the correction functions of the measured wind velocity, which depends on the geometry of the sonic anemometer and aerodynamic conditions. These results have been validated with the ones obtained in a wind tunnel test done on a single path UA, especially developed for research. The supports of this UA have been modified in order to reproduce the conditions of the theoretical model. Good agreements between experimental and theoretical results have been found

Measurement of velocity in rotational flows using ultrasonic anemometry: the flowmeter

In this paper a previously developed theoretical model of the measurement process performed by a transit-time ultrasonic anemometer is applied to a fluid flowing through a circular section pipe. This model considers the influence of the shift of the acoustic pulse trajectory from straight propagation due to the flow on the measured speed. The aim of this work is to estimate the errors induced in the measured velocity by the shift of the acoustic pulse trajectory. Using different duct’s flow models, laminar and turbulent regimes have been analyzed. The results show that neglecting the effect of shift of the acoustic pulse trajectory leads to flow rate measurement underestimation