Financial Applications of Random Matrix Theory: a short review

We discuss the applications of Random Matrix Theory in the context of financial markets and econometric models, a topic about which a considerable number of papers have been devoted to in the last decade. This mini-review is intended to guide the reader through various theoretical results (the Marcenko-Pastur spectrum and its various generalisations, random SVD, free matrices, largest eigenvalue statistics, etc.) as well as some concrete applications to portfolio optimisation and out-of-sample risk estimation.Comment: To appear in the "Handbook on Random Matrix Theory", Oxford University Pres

Transparency, Prices and Welfare with Imperfect Substitutes

Markets that are not completely transparent feature complex comparative statics with respect to the effect of number of firms, elasticity of substitution between goods and degree of transparency on equilibrium prices.The main result is that the following 'common wisdom' is incorrect: more transparent markets always feature lower prices, higher consumer welfare and lower price disperion.market structure;prices;welfare

LYING ABOUT WHAT YOU KNOW OR ABOUT WHAT YOU DO?

We compare communication about private information to communication about actions in a one-shot 2-person public good game with private information. The informed player, who knows the exact return from contributing and whose contribution is unobserved, can send a message about the return or her contribution. Theoretically, messages can elicit the uninformed player's contribution, and allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, however, we find that free-ride depends on the language: the informed player free-rides less-and thereby lies less frequently-when she talks about her contribution than when she talks about the return. Further experimental evidence indicates that it is the promise component in messages about the contribution that leads to less free-ride and less lying. © 2013 by the European Economic Association

Cores and related solution concepts for multi-choice games

Game Theory;Bargaining;econometrics

Two centuries of trend following

We establish the existence of anomalous excess returns based on trend following strategies across four asset classes (commodities, currencies, stock indices, bonds) and over very long time scales. We use for our studies both futures time series, that exist since 1960, and spot time series that allow us to go back to 1800 on commodities and indices. The overall t-stat of the excess returns is $\approx 5$ since 1960 and $\approx 10$ since 1800, after accounting for the overall upward drift of these markets. The effect is very stable, both across time and asset classes. It makes the existence of trends one of the most statistically significant anomalies in financial markets. When analyzing the trend following signal further, we find a clear saturation effect for large signals, suggesting that fundamentalist traders do not attempt to resist "weak trends", but step in when their own signal becomes strong enough. Finally, we study the performance of trend following in the recent period. We find no sign of a statistical degradation of long trends, whereas shorter trends have significantly withered.Comment: 17 pages, 9 figures, 9 table

Transparency and prices with imperfect substitutes

We show that an increase in consumer transparency may increase prices if goods are imperfect substitutes. If the consumers have more information about the goods that are available and about corresponding prices they will increase their demand. The effect of this on prices may override the competition enhancing effect of transparency. Keywords: Transparency; Demand effect; Competition effect JEL classification codes: D40; L1

Extending an eco-evolutionary understanding of biofilm-formation at the air-liquid interface to community biofilms

Growing bacterial populations diversify to produce a number of competing lineages. In the Pseudomonas fluorescens SBW25 model system, Wrinkly Spreader mutant lineages, capable of colonising the air-liquid interface of static microcosms by biofilm-formation, rapidly appear in diversifying populations with a fitness advantage over the ancestral wild-type strain. Similarly, a biofilm is rapidly produced by a community containing many biofilm-competent members, and selection by serial transfer of biofilm samples across microcosms results in a gradually changing community structure. Both the adaptive radiation producing Wrinkly Spreaders and the succession of biofilm communities in these static microcosms can be understood through evolutionary ecology in which ecological interactions and evolutionary processes are combined. Such eco-evolutionary dynamics are especially important for bacteria, as rapid growth, high population densities and strong selection in the context of infections can lead to fast changes in disease progression and resistance phenotypes, while similar changes in community function may also affect many microbially-mediated biotechnological and industrial processes. Evolutionary ecology provides an understanding of why bacterial biofilms are so prevalent and why they are such a successful colonisation strategy, and it can be directly linked to molecular analyses to understand the importance of pathways and responses involved in biofilm-formation