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55
Herding effects in order driven markets: the rise and fall of gurus
, 2010
"... We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure is endogenous and evolves using a fitness mechanism based on agents wealth. We assess how imitations among otherway noise traders, can give rise to ..."
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We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure is endogenous and evolves using a fitness mechanism based on agents wealth. We assess how imitations among otherway noise traders, can give rise to herd behaviour and how this behaviour affects asset prices. We show how price paths are strongly biased in the direction of the herd. Using a fitness mechanism then we study under which conditions a guru may rise and fall over time and his ability to manipulate the market. So purchases by guru may trigger sufficient purchases by imitators to allow the guru to make profit. In this setting we study the wealth distribution of guru, imitators and noimitators. 1 1
A proposal for impactadjusted valuation: Critical leverage and execution risk,” ArXiv eprints
, 2012
"... SFI Working Papers contain accounts of scientific work of the author(s) and do not necessarily represent the views of the Santa Fe Institute. We accept papers intended for publication in peerreviewed journals or proceedings volumes, but not papers that have already appeared in print. Except for pap ..."
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SFI Working Papers contain accounts of scientific work of the author(s) and do not necessarily represent the views of the Santa Fe Institute. We accept papers intended for publication in peerreviewed journals or proceedings volumes, but not papers that have already appeared in print. Except for papers by our external faculty, papers must be based on work done at SFI, inspired by an invited visit to or collaboration at SFI, or funded by an SFI grant. ©NOTICE: This working paper is included by permission of the contributing author(s) as a means to ensure timely distribution of the scholarly and technical work on a noncommercial basis. Copyright and all rights therein are maintained by the author(s). It is understood that all persons copying this information will adhere to the terms and constraints invoked by each author's copyright. These works may be reposted only with the explicit permission of the copyright holder. www.santafe.edu SANTA FE INSTITUTE Impactadjusted valuation and the criticality of leverage
Risk Premia and the Conditional Tails of Stock Returns
, 2009
"... Theory suggests that the risk of infrequent yet extreme events has a large impact on asset prices. Testing models of this hypothesis remains a challenge due to the difficulty of measuring tail risk fluctuations over time. I propose a new measure of timevarying tail risk that is motivated by asset p ..."
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Theory suggests that the risk of infrequent yet extreme events has a large impact on asset prices. Testing models of this hypothesis remains a challenge due to the difficulty of measuring tail risk fluctuations over time. I propose a new measure of timevarying tail risk that is motivated by asset pricing theory and is directly estimable from the cross section of returns. My procedure applies Hill’s (1975) tail risk estimator to the cross section of extreme events each day. It then optimally averages recent crosssectional Hill estimates to provide conditional tail risk forecasts. Empirically, my measure has strong predictive power for aggregate market returns, outperforming all commonly studied predictor variables. I find that a one standard deviation increase in tail risk forecasts an increase in excess market returns of 4.4 % over the following year. Crosssectionally, stocks that highly positively covary with my tail risk measure earn average annual returns 6.0 % lower than stocks with low tail risk covariation. I show that these results are consistent with predictions from two structural models: i) a long run risks economy with heavytailed consumption and dividend growth shocks, and ii) a timevarying rare disaster framework.
Economic Fluctuations and Statistical Physics: The Puzzle of Large Fluctuations
, 2004
"... Abstract. We present an overview of recent research applying ideas of statistical physics to try to better understand puzzles regarding economic fluctuations. One of these puzzles is how to describe outliers, phenomena that lie outside of patterns of statistical regularity. We review evidence consis ..."
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Abstract. We present an overview of recent research applying ideas of statistical physics to try to better understand puzzles regarding economic fluctuations. One of these puzzles is how to describe outliers, phenomena that lie outside of patterns of statistical regularity. We review evidence consistent with the possibility that such outliers may not exist. This possibility is supported by recent analysis of a database containing the bid, ask, and sale price of each trade of every stock. Further, the data support the picture of economic fluctuations, due to Plerou et al., in which a financial market alternates between being in an “equilibrium phase ” where market behavior is split roughly equally between buying and selling, and an “outofequilibrium phase ” where the market is mainly either buying or selling. Key words: Econophysics, powerlaw distributions, phase transitions, earthquakes 1.
Analysis of optimal liquidation in limit order books. Manchester Eprints
, 2015
"... In this paper we study the optimal trading strategy of a passive trader who is trading in the limit order book. Using a combined approach of accurate numerical methods and asymptotical analysis we examine the problem using different stochastic processes to model the asset price, as well as introduci ..."
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In this paper we study the optimal trading strategy of a passive trader who is trading in the limit order book. Using a combined approach of accurate numerical methods and asymptotical analysis we examine the problem using different stochastic processes to model the asset price, as well as introducing a proportional resilience for the limit order book. This results in more complex equations to solve than when examined under the case of standard Brownian motion, allowing us to perform interesting analytical (asymptotic) analysis which adds insight into the solution space. Under Geometric Brownian Motion, we reduce the resulting fourdimensional HamiltonJacobiBellman partial differential equation (PDE) to a novel threedimensional nonlinear PDE, as well as rescaling the variables to reduce the number of input parameters by two. We use numerical methods to solve the PDE before asymptotically examining it in several limits, with each approach informing and confirming the other. We find the transition from a timevarying solution to a perpetualtype solution results in the development of singular behaviour, and this transition is examined in some detail. Finally we emphasise the adaptability of our proposed methodologies by implementing the same methods on a meanreverting process for the asset price. Throughout the paper we also analyse the resulting trading strategies from a financial perspective. The trading strategies we develop are assetprice dependent, which to our knowledge is a unique concept in the passive optimal trading literature, and is arguably more realistic.
Complexity and the Character of Stock Returns: Empirical Evidence and a Model of Asset Prices Based Upon Complex Investor Learning
, 2005
"... who have provided comments on this and our related work and especially to three anonymous reviewers for their many insightful and useful comments. ..."
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who have provided comments on this and our related work and especially to three anonymous reviewers for their many insightful and useful comments.
Power Laws in Economics: An Introduction∗
, 2014
"... This paper is an elementary expository piece for the Journal of Economic Perspec ..."
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This paper is an elementary expository piece for the Journal of Economic Perspec
Secondorder Price Dynamics: Approach to Equilibrium with Perpetual Arbitrage
, 2012
"... The notion that economies should normally be in equilibrium is by now wellestablished; equally wellestablished is that economies are almost never precisely in equilibrium. Using a very general formulation, we show that under dynamics that are secondorder in time a price system can remain away from ..."
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The notion that economies should normally be in equilibrium is by now wellestablished; equally wellestablished is that economies are almost never precisely in equilibrium. Using a very general formulation, we show that under dynamics that are secondorder in time a price system can remain away from equilibrium with permanent and repeating opportunities for arbitrage, even when a damping term drives the system towards equilibrium. We also argue that secondorder dynamic equations emerge naturally when there are heterogeneous economic actors, some behaving as active and knowledgeable arbitrageurs, and others using heuristics. The essential mechanism is that active arbitrageurs are able to repeatedly benefit from the suboptimal heuristics that govern most economic behavior. Keywords: SMD theorem, disequilibrium macroeconomics, arbitrage, HelmholtzHodge theorem 1
GoetheUniversität Frankfurt House of Finance
"... Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter ..."
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Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter