Optimal Trading Strategy and Supply/Demand Dynamics

The supply/demand of a security in the market is an intertemporal, not a static, object and its dynamics is crucial in determining market participants' trading behavior. Previous studies on the optimal trading strategy to execute a given order focuses mostly on the static properties of the supply/demand. In this paper, we show that the dynamics of the supply/demand is of critical importance to the optimal execution strategy, especially when trading times are endogenously chosen. Using a limit-order-book market, we develop a simple framework to model the dynamics of supply/demand and its impact on execution cost. We show that the optimal execution strategy involves both discrete and continuous trades, not only continuous trades as previous work suggested. The cost savings from the optimal strategy over the simple continuous strategy can be substantial. We also show that the predictions about the optimal trading behavior can have interesting implications on the observed behavior of intraday volume, volatility and prices.

The Ulica Nikite Tolstoja hodonym on the city map of Vršac (Serbia)

This paper is devoted to the renaming of Ljubljanska street in the city of Vršac (Serbia) to commemorate Nikita Tolstoy on May 22, 2005. The paper’s author, who was then working as a Humanities Program assistant at the Russian Center of Science and Culture in Belgrade under the Russian Federation’s Ministry of Foreign Affairs, relays a memoir that references relevant media articles and describes the events which preceded this commemorative event. The memory of this outstanding philologist has become at once part of the historical and cultural legacy of his native city and the everyday context of its inhabitants thanks to the involvement of key individuals who are commemorated here. As pro-Europeanism led to the change of many Serbian naming conventions, the hodonym Ulica Nikite Tolstoja was adopted thanks to the efforts of Serbs, the residents of Vrsac, Russian employees of the Russian Center of Science and Culture in Belgrade, and the descendants of the Russian refugees who emigrated to the Kingdom of Yugoslavia between the two world wars. The renaming unites several types of historical convention, i.e. (1) to commemorate an outstanding person biographically associated with a place, in this case, the city of Vrsac, (2) the great Russian writer's attitude towards Serbs regarding their descent from and recognition of the global significance of Russian culture; (3) commemoration of a strong Russian figure also spiritually close to the Serbs; (4) commemoration of a humanist who was engaged in the history of the Serbian language and the study of the spiritual culture of the Slavs; (5) attitude to historical events related to the liberation of Serbia and this city from Nazi occupation during World War II; (6) attitude to the heritage of Russian emigration which fostered the revival of Kingdom of Yugoslavia after the First World War; (7) commemoration of a figure who unites within himself two parts of Russian society torn apart by the Civil War. Each of these semantic layers is determined by the peculiarities of the outstanding personality and biography of Academician Nikita Tolstoy. The initiators of this commemorative toponym hoped that its multiple semantic layers would allow it to be preserved in the geocultural space of Vrsac regardless of future political change. Neither narrower Serbian-Russian relations nor other factors should diminish the legitimate breadth of the consideration behind it

Essays on trades and security prices

Thesis (Ph. D.)--Massachusetts Institute of Technology, Sloan School of Management, 2007.Includes bibliographical references.This thesis consists of three chapters that investigate the complex relation between security prices and trades of market participants. In the first chapter, I study the evolution of stock prices after trades with different underlying motives using a novel data set of portfolio transitions. Institutional specifics allow me to identify portfolio transition purchases and sales as most likely induced by information-related and liquidity-related factors, respectively. I find that purchases permanently shift stock prices to new levels; moreover, these price changes are more significant after large trades, trades in stocks with a high degree of information asymmetry, and trades that reflect new rather than stale information. At the same time, sales trigger only temporary price pressure effects that are reversed in the following weeks. Thus, my findings provide supporting evidence for a long-standing tenet of market microstructure stating that information-motivated and liquidity-motivated transactions generate different price dynamics. In the second chapter, I analyze the price dynamics in response to trades in more detail; in particular, I focus on the properties of price impact. I explore the following questions: (1) how the price impact coefficients relate to various stock characteristics and differ across trading venues; (2) how they evolve during execution of multi-trade "packages"; and (3) what functional form best describes price impact functions. Regarding most of these questions, there exists an extensive theoretical literature which provides interesting insights. Using a unique data set of portfolio transition trades, I document a number of empirical facts about price impact, some of which can not be easily explained by existing models.(cont.) For instance, the price impact coefficients relate positively to the market capitalization and to the amount of noise trading; they increase during buy "packages" and decrease during sell "packages"; finally, total price impact is concave in trade size, fitting well the square-root specification, however, surprisingly, its permanent component is also non-linear. In the last chapter, based on joint work with Jiang Wang, we study how security prices affect trading strategies. The supply/demand of a security in the market is an intertemporal, not a static, object and its dynamics is crucial in determining market participants' trading behavior. We show that the dynamics of the supply/demand, rather than its static properties, is of critical importance to the optimal trading strategy of a given order. Using a limit-order-book market, we develop a simple framework to model the dynamics of supply/demand and its impact on execution cost. We demonstrate that the optimal execution strategy involves both discrete and continuous trades, not only continuous trades as previous work suggested. The cost savings from the optimal strategy over the simple continuous strategy can be substantial. We also show that the predictions about the optimal trading behavior can have interesting implications on the observed behavior of intraday volume, volatility and prices.by Anna A. Obizhaeva.Ph.D

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

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

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

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

Особенности применения ралтегравира у ВИЧ-инфицированных пациентов с различной соматической патологией

Purpose of the study. Evaluation of the efficacy, safety and tolerability of raltegravir regimens in HIV-infected patients with concomitant pathology in real clinical practice.Materials and methods. A retrospective analysis was carried out of 277 outpatient records of HIV-infected patients who received raltegravir (RAL) as a third component both in patients without previous experience of antiretroviral therapy (ART) and in patients with experience of treatment with various somatic pathologies. The main criterion for the effectiveness of the scheme was the proportion of patients with undetectable viral load at the start of the analysis. Additional criteria for evaluating the efficacy and safety of the regimen were the dynamics of the number of CD4-lymphocytes, the frequency and nature of undesirable side reactions.Results. On average, patients with no experience of treatment and with experience of treatment received regimens with raltegravir for about 5 years. At the time of the study in 2020, 69.8% of patients on ART for the first time continued to take a regimen containing raltegravir. In this group, the proportion of patients with virological suppression (PCR of HIV RNA less than 50 kopecks / ml) was 97.7%. 75.2% of patients in the second group in 2020 continued to take the RAL regimen. The proportion of patients with virological suppression (VL less than 50 kopecks / ml) in this group was 97.5%. During the treatment, there was no discontinuation of the regimen in both groups due to undesirable side reactions to raltegravir.Conclusion. The results of this study confirm that RAL-based regimens provide a high level of efficacy with a good tolerance and safety profile in routine clinical practice for both naive and experienced patients with various somatic pathologies.Цель: оценка эффективности, безопасности и переносимости схем, содержащих ралтегравир, у ВИЧ-инфицированных пациентов с различной сопутствующей патологией в реальной клинической практике.Материалы и методы. Проведен ретроспективный анализ 277 амбулаторных карт ВИЧ-инфицированных пациентов, получавших в качестве третьего компонента препарат ралтегравир (RAL) как у пациентов без предшествующего опыта антиретровирусной терапии (АРТ), так и у пациентов с опытом лечения с различной соматической патологией. Основным критерием эффективности схемы явилась доля пациентов с неопределяемым уровнем вирусной нагрузки на момент начала анализа. Дополнительными критериями оценки эффективности и безопасности схемы являлась динамика количества CD4-лимфоцитов, частота и характер нежелательных побочных реакций.Результаты. В среднем пациенты без опыта лечения и с опытом лечения получали схемы с ралтегравиром около 5 лет. На момент проведения исследования в 2020 г. 69,8% пациентов, которым АРТ была назначена впервые, продолжали принимать схему, содержащую ралтегра-вир. В данной группе доля пациентов с вирусологической супрессией (ПЦР РНК ВИЧ менее 50 коп/мл) составила 97,7%. 75,2% пациентов второй группы в 2020 г. продолжали принимать схему с RAL. Доля пациентов с вирусологической супрессией (ВН менее 50 коп/мл) в этой группе составила 97,5%. За время лечения в обеих группах не было отмены схемы в связи с нежелательными побочными реакциями на ралтегравир.Заключение. Результаты этого исследования подтверждают, что схемы на основе RAL обеспечивают высокий уровень эффективности с хорошим профилем переносимости и безопасности в рутинной клинической практике как у «наивных» пациентов, так и пациентов с опытом лечения различной соматической патологии

Designating market maker behaviour in limit order book markets

Financial exchanges provide incentives for limit order book (LOB) liquidity provision to certain market participants, termed designated market makers or designated sponsors. While quoting requirements typically enforce the activity of these participants for a certain portion of the day, an argument that liquidity demand throughout the trading day is far from uniformly distributed is made, and thus this liquidity provision may not be calibrated to the demand. Furthermore, it is propose that quoting obligations also include requirements about the speed of liquidity replenishment, and then a recommendation that use of the Threshold Exceedance Duration (TED) for this purpose be considered. To support this argument a comprehensive regression modelling approach using GLM and GAMLSS models to relate the TED to the state of the LOB and identify the regression structures that are best suited to modelling the TED is presented. Such an approach can be used by exchanges to set target levels of liquidity replenishment for designated market makers