This paper investigates the investment behaviour of a large unregulated financial institution (FI) with CARA risk preferences. It shows how the FI optimizes its trading to account for market illiquidity using an extension of the Almgren-Chriss market impact model of multiple risky assets. This expected utility optimization problem over the set of adapted strategies turns out to have the same solutions as a mean-variance optimization over deterministic trading strategies. That means the optimal adapted trading strategy is both deterministic and time-consistent. It is also found to have an explicit closed form that clearly displays interesting properties. For example, the classic constant Merton portfolio strategy, a particular solution of the frictionless limit of the problem, behaves like an attractor in the space of more general solutions. The main effect of temporary market impact is to slow down the speed of convergence to this constant Merton portfolio. The effect of permanent market impact is to incentivize the FI to buy additional risky assets near the end of the period. This property, that we name the Ponzi property, is related to the creation and bursting of bubbles in the market. The proposed model can be used as a stylized dynamic model of a typical FI in the study of the asset fire sale channel relevant to understanding systemic risk and financial stability.
Optimal Portfolios of Illiquid Assets. (arXiv:1610.00395v1 [q-fin.MF])
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Decoupling the short- and long-term behavior of stochastic volatility. (arXiv:1610.00332v1 [q-fin.ST])
We study the empirical properties of realized volatility of the E-mini S&P 500 futures contract at various time scales, ranging from a few minutes to one day. Our main finding is that intraday volatility is remarkably rough and persistent. What is more, by further studying daily realized volatility measures of more than five thousand individual US equities, we find that both roughness and persistence appear to be universal properties of volatility. Inspired by the empirical findings, we introduce a new class of continuous-time stochastic volatility models, capable of decoupling roughness (fine properties) from long memory and persistence (long-term behavior) in a simple and parsimonious way, which allows us to successfully model volatility at all intraday time scales. Our prime model is based on the so-called Brownian semistationary process and we derive a number of theoretical properties of this process, relevant to volatility modeling. Finally, in a forecasting study, we find that our new models outperform a wide array of benchmarks considerably, indicating that it pays off to exploit both roughness and persistence in volatility forecasting.
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Volatility Inference and Return Dependencies in Stochastic Volatility Models. (arXiv:1610.00312v1 [q-fin.MF])
Stochastic volatility models describe stock returns $r_t$ as driven by an unobserved process capturing the random dynamics of volatility $v_t$. The present paper quantifies how much information about volatility $v_t$ and future stock returns can be inferred from past returns in stochastic volatility models in terms of Shannon's mutual information.
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The complex dynamics of products and its asymptotic properties. (arXiv:1610.00274v1 [q-fin.EC])
We analyze global export data within the Economic Complexity framework. We couple the new economic dimension Complexity, which captures how sophisticated products are, with an index called logPRODY, a weighted average of the Gross Domestic Products per capita of a product's exporters. Products' aggregate motion is treated as a 2-dimensional dynamical system in the Complexity-logPRODY plane (CLP). We assign an average value of competition on the markets to points of the CLP, using the Herfindahl index. The motion of the products on the CLP consists in a fast movement away from zones where the competition is low, towards what we call the asymptotic zone, where competition is maximum. logPRODY of products in this area of maximum competition depends on their Complexity value. Since logPRODY is a proxy for the underlying set of countries that export a given product, displacements on the plane correspond to shifts in the export market. The observed dynamics can be modeled with an equation linking average speed to competition. The asymptotic logPRODY value corresponds to a market configuration that maximizes competition. We characterize it and call it asymptotic market; we find that its shape depends on the Complexity value of the product.
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Limit Order Strategic Placement with Adverse Selection Risk and the Role of Latency. (arXiv:1610.00261v1 [q-fin.TR])
This paper is split in three parts: first we use labelled trade data to exhibit how market participants accept or not transactions via limit orders as a function of liquidity imbalance; then we develop a theoretical stochastic control framework to provide details on how one can exploit his knowledge on liquidity imbalance to control a limit order. We emphasis the exposure to adverse selection, of paramount importance for limit orders. For a participant buying using a limit order: if the price has chances to go down the probability to be filled is high but it is better to wait a little more before the trade to obtain a better price. In a third part we show how the added value of exploiting a knowledge on liquidity imbalance is eroded by latency: being able to predict future liquidity consuming flows is of less use if you have not enough time to cancel and reinsert your limit orders. There is thus a rational for market makers to be as fast as possible as a protection to adverse selection. Thanks to our optimal framework we can measure the added value of latency to limit orders placement.
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Hysteresis and Duration Dependence of Financial Crises in the US: Evidence from 1871-2016. (arXiv:1610.00259v1 [q-fin.ST])
This study analyses the duration dependence of events that trigger volatility persistence in stock markets. Such events, in our context, are monthly spells of contiguous price decline or negative returns for the S&P500 stock market index over the last 145 years. Factors known to affect the duration of these spells are the magnitude or intensity of the price decline, long-term interest rates and economic recessions, among others. The result of interest is the conditional probability of ending a spell of consecutive months over which stock market returns remain negative. In this study, we rely on continuous time survival models in order to investigate this question. Several specifications were attempted, some of which under the proportional hazards assumption and others under the accelerated failure time assumption. The best fit of the various models endeavored was obtained for the log-normal distribution. This distribution yields a non-monotonic hazard function that increases up to a maximum and then decreases. The peak is achieved 2-3 months after the spells onset with a hazard of around 0.9 or higher; this hazard then decays asymptotically to zero. Spells duration increase during recessions, when interest rate rises and when price declines are more intense. The main conclusion is that short spells of negative returns appear to be mainly frictional while long spells become structural and trigger hysteresis effects after an initial period of adjustment. Although in line with our expectations, these results may be of some importance for policy-makers.
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XVA at the Exercise Boundary. (arXiv:1610.00256v1 [q-fin.PR])
XVA is a material component of a trade valuation and hence it must impact the decision to exercise options within a given netting set. This is true for both unsecured trades and secured / cleared trades where KVA and MVA play a material role even if CVA and FVA do not. However, this effect has frequently been ignored in XVA models and indeed in exercise decisions made by option owners. This paper describes how XVA impacts the exercise decision and how this can be readily evaluated using regression techniques (Longstaff and Schwartz 2001). The paper then assesses the materiality of the impact of XVA at the exercise boundary on swaption examples.
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China Construction Bank Lists USD 600 Million Bond On Nasdaq Dubai
The Hong Kong branch of China Construction Bank (CCB) listed a 600 million US dollar bond today on Nasdaq Dubai, the region’s international financial exchange.
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Chi-X Japan Launches New Venue - Kai-X To Deliver Japan’s First Broker-Neutral Reference Price Trading Venue
Chi-X Japan will launch a new venue, Kai-X, on October 17, 2016, having gained final regulatory approvals and registration with Japan’s Financial Services Agency.
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EPEX SPOT Power Trading Results Of September 2016 - Members Extend Trading Activities
In September 2016, a total volume of 40 TWh was traded on EPEX SPOT’s Day-Ahead and Intraday power markets (September 2015: 43 TWh).
Day-Ahead markets
In September 2016, power trading on the Day-Ahead markets on EPEX SPOT (including APX) accounted for a total of 35,149,574 MWh (September 2015: 38,419,943 MWh).
Prices in Central Western Europe, connected within the Multiregional Coupling, converged 26% of the time (September 2015: 8%).
Intraday markets
On the EPEX SPOT Intraday markets (including APX), a total volume of 4,832,405 MWh was traded in September 2016 (September 2015: 4,553,958 MWh).
In September, cross-border trades represented 15% of the total continuous Intraday volume in Germany, France, Austria and Switzerland. 15-minute contracts represented 12% of the volume traded on the German, Austrian and Swiss continuous Intraday markets.
New members
EPEX SPOT welcomed two new members to the Exchange. Vattenfall Europe Generation AG joined German Day-Ahead market as well as German Intraday 15-minutes auction in September. Yusupov Limited joined UK Intraday markets as well as UK Day-Ahead markets.
Several existing members extended their activity on the different markets, underlining their interest in enlarging their trading portfolio across Europe and witnessing the benefits of an integrated market. Ekologicke Zdroje Energie s.r.o. (Czech Republic) joins the French Day-Ahead as well as the French Intraday market, SE Energy Trading GmbH (Germany) joins the German Intraday market and Engelhart CTP (Switzerland) SA joins the 15-minutes auction of the German Intraday market. POWERMART ApS (Denmark) joins the Austrian Intraday market as well as the Belgian Intraday market.
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Thirteen Listed Companies To Update International Fund Managers On Growth Strategies: DFM Strengthens Growth Of Its International Investor Base Through New York Roadshow On 17 – 18 October 2016
Dubai Financial Market (DFM) will hold its International Investor Roadshow on Monday and Tuesday 17 – 18 October 2016 in New York with co-sponsorship from Bank of America Merrill Lynch (BofAML). The roadshow enables 13 companies listed on DFM and Nasdaq Dubai to update international fund managers about growth strategies and recent developments through one-on-one meetings.
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Tradovate And Jigsaw Trading Partner To Benefit Clients - Tradovate’s First Third-Party Integration Brings Jigsaw’s #1 Rated Order Flow Trading Tools To Platform
Tradovate, LLC, an online brokerage firm for active, self-directed futures traders that opened for business in April, today announced the successful launch of its first third-party integration. The firm has partnered with Jigsaw Trading to offer the software provider’s popular order flow analysis tools to Tradovate clients, while Jigsaw users will have the opportunity to benefit from Tradovate’s commission-free structure and cloud-based trading platform.
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United Kingdom Parliament Treasury Committee Update: Chair Responds To Chancellor's Conference Speech
The Treasury Committee Chair, Rt Hon. Andrew Tyrie MP, responds to the Chancellor's speech at the Conservative Party Conference.
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CME Group Reached Average Daily Volume Of 15 Million Contracts Per Day In September 2016, Up 6 Percent From September 2015
CME Group, the world's leading and most diverse derivatives marketplace, today announced that September 2016 average daily volume (ADV) reached 15 million contracts per day, up 6 percent from September 2015. CME Group September 2016 options volume averaged 2.9 million contracts per day, up 9 percent versus September 2015, with electronic options averaging 1.7 million contracts per day, up 22 percent over the same period last year. Third-quarter 2016 volume averaged 14.3 million contracts per day, flat compared with a strong third-quarter 2015. CME Group year-to-date 2016 ADV through September averaged 15.4 million contracts per day, up 8 percent. Total open interest at the end of third-quarter 2016 was 103 million contracts, up 12 percent from year-end 2015. During the quarter, CME Group reached open interest approaching record levels, peaking at 111.2 million contracts on September 15, 2016.
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ITG Completes TCA Integration with FX Connect
Combines FX Counterparty Management with Best Execution Measurement NEW YORK, Oct. 04, 2016 (GLOBE NEWSWIRE) -- ITG (NYSE:ITG), a leading independent broker and financial technology provider, and FX Connect, State Street Global Marketâs end-to end, multi-bank foreign exchange platform, announced today that ITG TCA® for FX is now integrated with the FX Connect trading platform. Institutional investors can now use FX Connect and ITG TCA for FX to measure and analyze their FX trading to demonstrate best execution in the evolving global Foreign Exchange OTC marketplace. ITG TCA for FX combines Dealer, ECN and interbank market sources to provide a rich analysis covering Spot, Forward, Swap, ...
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Meeting the Challenge of Hospital Acquired Infections
Nosocomial or healthcare-associated infections (HAIs) can be contracted by patients while receiving medical treatment in healthcare facilities. These infections are a major yet often preventable threat to patient safety. Joined by healthcare and public health partners, the Center for Disease Control (CDC) and the Joint Commission are working to bring increased attention to HAIs and prevention methods. With the increased prevalence of superbugs (associated with the indiscriminate use and prescribing of antibiotics) and the emphasis on improving throughput in healthcare facilities (which can give rise to failures in terminal cleaning of procedural and patient rooms and equipment) HAIs remain a difficult problem to manage. Organizations like the Joint Commission and regulatory agencies such as the CDC and Center for Medicare and Medicaid Services (CMS) have recently advised the healthcare industry of new standards to better manage this problem that will soon take effect.
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Fallen Angels - do downgraded bonds offer an opportunity for investment?
The Centre for Asset Management Research at Cass Business School, City, University of London in cooperation with Invesco Powershares has launched a white paper which looks at the investment potential offered by downgraded bonds.
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TSX Company Services Announces Agreement With Ipreo - Market Open Ceremony Marks New Agreement Between TMX's Listed Company Support Division And Global Provider Of Market Intelligence, Analytics And IR Workflow Tools
TSX Company Services today announced an agreement with Ipreo, a leading global provider of financial services technology, data and analytics. TSX Company Services has teamed up with Ipreo to offer Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) issuers the in-depth analysis and dynamic functionality they need to build and execute their IR strategies, including Ipreo's global investor identification and targeting, IR workflow tools and buy-side perception studies.
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Eurex Trading Statistics In September 2016
The investment behaviour of the buy side is undergoing structural changes. Passive products like Exchange Traded Funds (ETF) are gaining momentum. This changes the investment behaviour on the derivatives markets and increasingly shapes the product offering of exchanges. “The growing success of indexation via ETF has brought index providers further to the forefront of asset allocation – not only on the investment side, but also in trading”, said Eurex CEO Thomas Book when presenting Deutsche Börse Group’s latest derivative trading statistics (see attachment). Especially broad based indices like MSCI and Stoxx600 are profiting from that trend. In September, Eurex’ MSCI segment reached 1 million contracts of open interest for the first time.
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Moscow Exchange Indices Monthly Review: September 2016
In September, Moscow Exchange"s Indices reflected the positive trend on the Russian stock market. The MICEX Index was up 0.33% to 1,978.00 (from 1,971.59 on 31 August), while the dollar-denominated RTS Index rose 4.28% to 990.88 (from 950.25).
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