213 research outputs found
Mathematical programming methods of pattern classification
Mathematical programming methods of pattern classificatio
Anomalous price impact and the critical nature of liquidity in financial markets
We propose a dynamical theory of market liquidity that predicts that the
average supply/demand profile is V-shaped and {\it vanishes} around the current
price. This result is generic, and only relies on mild assumptions about the
order flow and on the fact that prices are (to a first approximation)
diffusive. This naturally accounts for two striking stylized facts: first,
large metaorders have to be fragmented in order to be digested by the liquidity
funnel, leading to long-memory in the sign of the order flow. Second, the
anomalously small local liquidity induces a breakdown of linear response and a
diverging impact of small orders, explaining the "square-root" impact law, for
which we provide additional empirical support. Finally, we test our arguments
quantitatively using a numerical model of order flow based on the same minimal
ingredients.Comment: 16 pages, 7 figure
A simple scheme for allocating capital in a foreign exchange proprietary trading firm
We present a model of capital allocation in a foreign exchange proprietary trading firm. The owner allocates capital to individual traders, who operate within strict risk limits. Traders specialize in individual currencies, but are given discretion over their choice of trading rule. The owner provides the simple formula that determines position sizes – a formula that does not require estimation of the firm-level covariance matrix. We provide supporting empirical evidence of excess risk-adjusted returns to the firm-level portfolio, and we discuss a modification of the model in which the owner dictates the choice of trading rule
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