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on Market Microstructure |
| By: | Wai-Ki Ching; Jia-Wen Gu; Qing-Qing Yang; Tak-Kuen Siu |
| Abstract: | In this paper, the optimal pricing strategy in Avellande-Stoikov's for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers' trading intensities, their optimal bid and ask prices and therefore their spreads are derived when the dealers are informed the severity of the competition. The effects of various parameters on the bid-ask quotes and profits of the dealers in a competitive market are also discussed. This study gives some insights on the average spread, profit of the dealers in a competitive trading environment. |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1512.08866&r=mst |
| By: | B Bouchard (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris IX - Paris Dauphine - CNRS - Centre National de la Recherche Scientifique); G Loeper (Monash University (AUSTRALIA) - Monash University (AUSTRALIA), FiQuant - Chaire de finance quantitative - Ecole Centrale Paris); Y Zou (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris IX - Paris Dauphine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the super-replication price is the viscosity solution of a fully non-linear parabolic equation. As a by-product, we show how ε-optimal strategies can be constructed. Finally, a numerical resolution scheme is proposed. |
| Keywords: | Stochastic target ,Hedging, Price impact |
| Date: | 2015–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01247523&r=mst |
| By: | Paul Mizen; Veronica Veleanu |
| Abstract: | We investigate the information flow from credit default swap (CDS) spreads to macroeconomic activity in the United States and twelve European countries. We show that single-name CDS contracts across maturities and sectors provide significant information that anticipates future contractions. The more heavily traded 5-year maturity contracts and the iTraxx European/Markit North American CDS indexes show stronger results, indicating that these forward-looking and highly liquid instruments confer an economically and statistically significant financial signal for future economic activity. Focusing only on the most liquid CDS contracts, we then examine whether better liquidity in the CDS market is accompanied by a higher level of informed trading. A longer sample of US and previously unexplored European country-level data shows information flow intensifies as we approach credit events, and that the number of credit events provides a useful signal in itself of future economic downturns. Finally, we decompose the CDS premium into a liquidity and a residual component (proxying credit and other market risks), and find evidence that liquidity plays a greater role in explaining future macro outcomes over the sample period. |
| Keywords: | credit default swaps, liquidity, credit risk, economic activity |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:15/21&r=mst |
| By: | Krauss, Christopher; Stübinger, Johannes |
| Abstract: | We develop a copula-based pairs trading framework and apply it to the S&P 100 index constituents from 1990 to 2014. We propose an integrated approach, using copulas for pairs selection and trading. Essentially, we fit t-copulas to all possible combinations of pairs in a 12 month formation period. Next, we run a 48 month in-sample pseudo-trading to assess the profitability of mispricing signals derived from the conditional marginal distribution functions of the t-copula. Finally, the most suitable pairs based on the pseudo-trading are determined, relying on profitability criteria and dependence measures. The top pairs are transferred to a 12 month trading period, and traded with individualized exit thresholds. In particular, we differentiate between pairs exhibiting mean-reversion and momentum effects and apply idiosyncratic take-profit and stop-loss rules. For the top 5 mean-reversion pairs, we find out-of-sample returns of 7.98 percent per year; the top 5 momentum pairs yield 7.22 percent per year. Return standard deviations are low, leading to annualized Sharpe ratios of 1.52 (top 5 mean-reversion) and 1.33 (top 5 momentum), respectively. Since we implement this strategy on a highly liquid stock universe, our findings pose a severe challenge to the semi-strong form of market efficiency and demonstrate a sophisticated yet profitable alternative to classical pairs trading. |
| Keywords: | statistical arbitrage,pairs trading,quantitative strategies,copula |
| JEL: | G11 G12 G14 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwqwdp:152015&r=mst |