Stock Price Dynamics and Option Valuations under Volatility Feedback Effect

According to the volatility feedback effect, an unexpected increase in squared volatility leads to an immediate decline in the price-dividend ratio. In this paper, we consider the properties of stock price dynamics and option valuations under the volatility feedback effect by modeling the joint dynamics of stock price, dividends, and volatility in continuous time. Most importantly, our model predicts the negative effect of an increase in squared return volatility on the value of deep-in-the-money call options and, furthermore, attempts to explain the volatility puzzle. We theoretically demonstrate a mechanism by which the market price of diffusion return risk, or an equity risk-premium, affects option prices and empirically illustrate how to identify that mechanism using forward-looking information on option contracts. Our theoretical and empirical results support the relevance of the volatility feedback effect. Overall, the results indicate that the prevailing practice of ignoring the time-varying dividend yield in option pricing can lead to oversimplification of the stock market dynamics.Comment: 23 pages, 7 figures, 2 table

Multilayer Aggregation with Statistical Validation: Application to Investor Networks

Multilayer networks are attracting growing attention in many fields, including finance. In this paper, we develop a new tractable procedure for multilayer aggregation based on statistical validation, which we apply to investor networks. Moreover, we propose two other improvements to their analysis: transaction bootstrapping and investor categorization. The aggregation procedure can be used to integrate security-wise and time-wise information about investor trading networks, but it is not limited to finance. In fact, it can be used for different applications, such as gene, transportation, and social networks, were they inferred or observable. Additionally, in the investor network inference, we use transaction bootstrapping for better statistical validation. Investor categorization allows for constant size networks and having more observations for each node, which is important in the inference especially for less liquid securities. Furthermore, we observe that the window size used for averaging has a substantial effect on the number of inferred relationships. We apply this procedure by analyzing a unique data set of Finnish shareholders during the period 2004-2009. We find that households in the capital have high centrality in investor networks, which, under the theory of information channels in investor networks suggests that they are well-informed investors

Tensor Representation in High-Frequency Financial Data for Price Change Prediction

Nowadays, with the availability of massive amount of trade data collected, the dynamics of the financial markets pose both a challenge and an opportunity for high frequency traders. In order to take advantage of the rapid, subtle movement of assets in High Frequency Trading (HFT), an automatic algorithm to analyze and detect patterns of price change based on transaction records must be available. The multichannel, time-series representation of financial data naturally suggests tensor-based learning algorithms. In this work, we investigate the effectiveness of two multilinear methods for the mid-price prediction problem against other existing methods. The experiments in a large scale dataset which contains more than 4 millions limit orders show that by utilizing tensor representation, multilinear models outperform vector-based approaches and other competing ones.Comment: accepted in SSCI 2017, typos fixe