Develops a framework for valuing Asian options with market impact.
problem Valuation of Asian options under price impact.
method Discrete-time quote-level model, continuous-time limits, Hamilton-Jacobi-Bellman equations, CRR-style tree-based Bellman algorithm.
result Endogenous trading volumes feed into prices and costs, leading to nontrivial bid-ask spreads.
Investor optimizes utility in a market with endogenous pricing.
problem Maximizing utility in an incomplete market with endogenous pricing.
method Characterized optimality via FBSDEs and BSPDEs using generalized subgradients.
result Existence and smoothness of solutions for optimal investment and FBSDEs.
This paper studies the optimal investment problem with random endowment in an inventory-based price impact model with competitive market makers. Our goal is to analyze how price impact affects optimal policies, as well as both pricing rules and demand schedules for contingent claims. For exponential market makers prefe…
Study classifies stock price jumps as exogenous or endogenous using news data.
problem Differentiating between exogenous and endogenous price jumps.
method Synchronized news data with order book data to analyze stock price movements.
result Exogenous jumps are abrupt and follow a decaying power-law, while endogenous jumps are progressively accelerating.
Theory of price impact on bond term structure.
problem Understanding price impact in interest rate markets.
method Formulated instantaneous and transient price impact on bonds with different maturities, connecting to no-arbitrage theory.
result Price impact can be embedded in the pricing measure and no-arbitrage preserved.
This note explores the consequences of nonlinear price impact functions on price dynamics within the chartist-fundamentalist framework. Price impact functions may be nonlinear with respect to trading volume. As indicated by recent empirical studies, a given transaction may cause a large (small) price change if market d…
The paper studies price impacts in asset liquidation markets.
problem Understanding price impacts in asset liquidation markets.
method Equilibrium formulation and analysis of price impacts.
result Existence and uniqueness of clearing prices for portfolio liquidation.
We study optimal liquidation of a trading position (so-called block order or meta-order) in a market with a linear temporary price impact (Kyle, 1985). We endogenize the pressure to liquidate by introducing a downward drift in the unaffected asset price while simultaneously ruling out short sales. In this setting the l…
We review the evidence that the erratic dynamics of markets is to a large extent of endogenous origin, i.e. determined by the trading activity itself and not due to the rational processing of exogenous news. In order to understand why and how prices move, the joint fluctuations of order flow and liquidity - and the way…
The study examines pricing American options with both exogenous and endogenous transaction costs.
problem Pricing American options with transaction costs and liquidity risks.
method Modeling liquidity risks as a mean-reverting process and transaction costs as proportional to trading amount. Two nonlinear PDEs are used to characterize option values. Numerical solution via ADI method and model calibration using maximum likelihood estimation.
result The model incorporating liquidity risks significantly outperforms the Leland model.
This paper optimizes brokerage contracts for multiple clients trading a single asset.
problem Optimizing brokerage contracts for multiple clients trading a single asset.
method Endogenously determines clients' reservation values and strategically chooses clients. Characterizes optimal portfolios computationally.
result Characterizes optimal portfolios of clients and their profits, showing dependence on price impact coefficients.
Finance is about how the continuous stream of news gets incorporated into prices. But not all news have the same impact. Can one distinguish the effects of the Sept. 11, 2001 attack or of the coup against Gorbachev on Aug., 19, 1991 from financial crashes such as Oct. 1987 as well as smaller volatility bursts? Using a …
The study identifies features making cross-impact relevant in explaining price variance of US assets.
problem Understanding the relevance of cross-impact in explaining price variance of US assets.
method Using tick-by-tick data spanning 5 years for 500 US assets, the study investigates the features making cross-impact relevant.
result Price formation is endogenous within highly liquid assets, influencing less liquid correlated products with a constrained impact velocity.
We model a nonlinear price curve quoted in a market as the utility indifference curve of a representative liquidity supplier. As the utility function we adopt a g-expectation. In contrast to the standard framework of financial engineering, a trader is no more price taker as any trade has a permanent market impact via a…
New method identifies algo trading strategies as liquidity consumers or providers.
problem Determining if algo trading strategies consume or provide liquidity.
method Analyzes trade and price history to classify strategies as liquidity consumers or providers.
result Identifies net liquidity consumption or provision of algo trading strategies.
Study analyzes market equilibrium returns with price impact and transaction costs.
problem Modeling equilibrium returns in markets with strategic order placement and transaction costs.
method Analyzes frictionless and transaction-cost markets, characterizes Nash equilibrium via FBSDEs.
result Equilibrium returns are affected by transaction costs, especially with noise traders.
Optimal trading strategy under market resistance and concave price impact model.
problem Optimal trading in a market with endogenous resistance and concave price impact.
method Modeling market resistance, deriving a stochastic Fredholm equation, proving existence and uniqueness, proposing an iterative scheme.
result Existence and uniqueness of optimal control under certain conditions, exponential convergence of iterative scheme.
ABIDES-MARL uses MARL to study market behavior in a realistic financial simulation.
problem Understanding equilibrium behavior in complex financial market games.
method Combines MARL with a realistic LOB simulation to study market behavior.
result Validated approach by solving an extended Kyle model and showing how execution strategies shape market dynamics.
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an exogenous open market …
Study shows how macroeconomic news affects intraday price and order flow dynamics.
problem Understanding how macroeconomic news impacts intraday price and order flow dynamics.
method Structural VAR model identified through heteroskedasticity, estimated at one-second frequency for each 15-minute interval.
result Macroeconomic news announcements reshape price-flow dynamics, with significant impacts on price and flow impacts at the one-second horizon.
This paper models financial contagion with endogenously determined market liquidity.
problem Financial contagion and its impact on market liquidity during price drops.
method Developed a joint clearing system for interbank payments, asset prices, and market liquidity, with endogenous market capacity.
result Endogenous market liquidity significantly affects system risk during financial contagion.
Study shows how adaptive market agents can lead to persistent overpricing in financial markets.
problem Persistent overpricing in financial markets by adaptive market agents.
method Analyzes a repeated game between market maker and market taker, decomposes the game into competitive and collaborative components, and uses projected stochastic gradient ascent.
result Decentralized learning by adaptive market agents can lead to persistent overpricing in financial markets.
We consider a class of generalized capital asset pricing models in continuous time with a finite number of agents and tradable securities. The securities may not be sufficient to span all sources of uncertainty. If the agents have exponential utility functions and the individual endowments are spanned by the securities…
Agent-based market shows herding cycles with square-root price impact.
problem Understanding herding cycles in agent-based markets.
method Agent-based model with 20,000 retail traders interacting with a single institutional agent.
result Agent discovers multi-cycle predatory strategy with 8-11 complete cycles over 2000 trading days.
Funds inflate their returns due to price pressure, leading to wealth reallocation and market crashes.
problem Funds inflate their returns due to price pressure, leading to wealth reallocation and market crashes.
method Decomposed fund returns into price pressure and fundamental components, and identified the impact of price chasing on fund flows.
result Funds' self-inflated returns lead to wealth reallocation and market crashes, and can be predicted by fund illiquidity.
Study on price formation in a market with a major player and minor firms.
problem Equilibrium price formation in a market with a major financial firm and many minor firms.
method Analyzes the equilibrium price process in both finite and mean field models, considering idiosyncratic and common noises.
result Derives the functional form of price impact for the major firm in both market sizes.
We study the effect of parameter uncertainty on a stochastic diffusion model, in particular the impact on the pricing of contingent claims, using methods from the theory of Dirichlet forms. We apply these techniques to hedging procedures in order to compute the sensitivity of SDE trajectories with respect to parameter …
We provide a general probabilistic framework within which we establish scaling limits for a class of continuous-time stochastic volatility models with self-exciting jump dynamics. In the scaling limit, the joint dynamics of asset returns and volatility is driven by independent Gaussian white noises and two independent …
This paper highlights the role of risk neutral investors in generating endogenous bubbles in derivatives markets. We find that a market for derivatives, which has all the features of a perfect market except completeness and has some risk neutral investors, can exhibit extreme price movements which represent a violation…
Survival strategies in a market with self-determined prices are closely tied to log-optimal investment.
problem Survival of wealth in a market with endogenous prices.
method Assume only one's actions affect prices, use log-optimal strategy, disregard actual prices.
result Survival strategies are asymptotically close to log-optimal strategies.
Existence of incomplete Radner equilibrium with endogenous noise tracker.
problem Existence of incomplete Radner equilibrium in a model with endogenous noise tracker.
method Proved existence through a coupled system of ODEs, reduced to two coupled ODEs.
result Endogenous noise tracker leads to higher aggregate welfare for large stock supply.
Model predicts BESS interactions and price impacts in energy markets.
problem Understanding BESS interactions and price formation in energy markets.
method Stochastic game-theoretic model with linear-quadratic differential game.
result Equilibrium controls and prices derived for BESSs in both heterogeneous and homogeneous settings.
We examine optimal execution models that take into account both market microstructure impact and informational costs. Informational footprint is related to order flow and is represented by the trader's influence on the flow imbalance process, while microstructure influence is captured by instantaneous price impact. We …
We present a simulation-and-regression method for solving dynamic portfolio allocation problems in the presence of general transaction costs, liquidity costs and market impacts. This method extends the classical least squares Monte Carlo algorithm to incorporate switching costs, corresponding to transaction costs and t…
We present a model that investigates the spontaneous emergence of randomness in equity market microstructure. The phase space analysis of our model exposes an endogenous source of fluctuation in price and volume. We formulate a control problem for maximizing price regularity and stability while minimizing entanglement …
New method for personalized pricing using invalid instrumental variables.
problem Personalized pricing under endogeneity with limited standard methods.
method PRINT method for continuous treatment, solving conditional moment restrictions.
result Established optimal pricing strategy under endogeneity with invalid instrumental variables.
The paper analyzes the joint dynamics of prices and order flow in electronic order books.
problem Understanding the micro-dynamics of asset prices in high-frequency trading environments.
method Double coarse-graining procedure and Principal Component Analysis to extract meaningful information.
result The VAR model captures the stability of liquidity modes and their dynamical evolution.
The paper explains stock market predictability through a model of heterogeneous beliefs.
problem Understanding and predicting stock market behavior based on news and investor beliefs.
method A discrete-time model of heterogeneous beliefs where some agents receive noisy signals about asset fundamentals.
result Momentum and reversal in stock prices arise from investors' incorrect beliefs about signal accuracy and fundamental values.
A price-maker company extracts an exhaustible commodity from a reservoir, and sells it instantaneously in the spot market. In absence of any actions of the company, the commodity's spot price evolves either as a drifted Brownian motion or as an Ornstein-Uhlenbeck process. While extracting, the company affects the marke…
Model predicts carbon price for green tech adoption.
problem Achieving emission targets with green technology adoption.
method Stationary equilibrium model with endogenous carbon price.
result Carbon price and stationary distribution of firms identified.
We study the price-setting problem of market makers under risk neutrality and perfect competition in continuous time. Thereby we follow the classic Glosten-Milgrom model that defines bid and ask prices as expectations of a true value of the asset given the market makers' partial information that includes the customers …
Model shows AI adoption amplifies financial market risk through prediction, herding, and cognitive dependency.
problem Systemic risk in financial markets due to AI adoption.
method Developed a unified model within an extended rational expectations framework, incorporating endogenous adoption, performative prediction, algorithmic herding, and cognitive dependency.
result Systemic risk multiplier grows superlinearly with AI penetration, implying tail-loss amplification of 18-54%.
A method to identify new classes of price jumps in financial markets.
problem Separating endogenous and exogenous causes of price jumps.
method Wavelet-based representation of jump time-series.
result Identification of new classes of jumps and investigation of co-jumps.
We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process, and a defaultable bond, whose prices are determined via equilibrium. We analyze fi…
Study high-frequency trading game with price impact, finding unique equilibrium.
problem Optimal execution in a trading game with transient price impact.
method Analyzes high-frequency limit of an n-trader optimal execution game. result High-frequency limit converges to a continuous-time model with quadratic costs.
Model strategic interactions between market makers and traders to optimize execution.
problem Optimizing execution in markets with strategic interactions.
method Stochastic game modeling with FBSDEs and decoupling approach.
result Established Nash equilibria and global well-posedness for specific models.
We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The Value-at-Risk constraint implies that when perceived risk is low, leverage is high…
Analyzes how economic policies affect wealth distribution in Bitcoin token economy.
problem Impact of economic policies on wealth distribution in token economies.
method Eliminated noise in wealth distribution data using macroeconomic and microeconomic time series. Causality analysis between BIPs and wealth distribution data.
result Proposed a structure for economic policy taxonomy in token economies.