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Econometrics Beat wrote a new blog post titled Unit Roots & Structural Breaks
The open-access journal, Econometrics (of which I'm happy to be an Editorial Board member), has recently published a special issue on the topic of "Unit Roots and Structural Breaks".  This issue is guest-edited by Pierre Perron, and it includes eight really terrific papers. You can find the special issue here. © 2017, David E. Giles
15 hours ago
The Reformed Broker wrote a new blog post titled Opposite Day
This is backwards. It’s also the reason God sent financial advisors into the world. Unless the bulk of these millennials are on the verge of buying their first home (doubtful), they should have no more than a few months’ salary in cash and very little fixed income exposure. But they think they’re being prudent by......
20 hours ago
Magic, Maths and Money wrote a new blog post titled Political and Financial Crises
My book, Ethics in Quantitative Finance, was motivated by the wish to understand the relationship between mathematics and financial ethics in the aftermath of the Credit Crisis (GFC).  While the GFC occured a decade ago, the topics discussed in Ethics in Quantitative Finance are still relevant today as the UK endures a "Great Political Crisis", a year after voting to leave the European Union.  Had someone drawn a connection between mathematics, ethics and politics for me in 2006 I would have ignored them, suggesting that the scholarship underpinning the book is transformative. A...
21 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Virtual Relationships: Short- and Long-run Evidence from BitCoin and Altcoin Markets. (arXiv:1706.07216v1 [q-fin.EC])
This study empirically examines interdependencies between BitCoin and altcoin markets in the short- and long-run. We apply time-series analytical mechanisms to daily data of 17 virtual currencies (BitCoin + 16 alternative virtual currencies) and two Altcoin price indices for the period 2013-2016. Our empirical findings confirm that indeed BitCoin and Altcoin markets are interdependent. The BitCoin-Altcoin price relationship is significantly stronger in the short-run than in the long-run. We cannot fully confirm the hypothesis that the BitCoin price relationship is stronger with those...
Quantitative Finance at arXiv wrote a new blog post titled Strong convergence rates for Euler approximations to a class of stochastic path-dependent volatility models. (arXiv:1706.07375v1 [q-fin.CP])
We consider a class of stochastic path-dependent volatility models where the stochastic volatility, whose square follows the Cox-Ingersoll-Ross model, is multiplied by a (leverage) function of the spot price, its running maximum, and time. We propose a Monte Carlo simulation scheme which combines a log-Euler scheme for the spot process with the full truncation Euler scheme or the backward Euler-Maruyama scheme for the squared stochastic volatility component. Under some mild regularity assumptions and a condition on the Feller ratio, we establish the strong convergence with order 1/2 (up to a...
Numerix LLC wrote a new blog post titled Numerix Vantage Point Series | New Best Practices for Operating in Today's Capital Markets Reality
Title: Numerix Vantage Point Series | New Best Practices for Operating in Today's Capital Markets RealityPublication Date & Time: Thu, 06/22/2017 - 00:00NUMERIX VANTAGE POINT SERIES Steven O'Hanlon, President and Chief  Executive Officer of Numerix, discusses what he sees as the new best practices capital markets players need to undertake to succeed in today's capital markets reality. Since 2010, when the first of a series of critical reforms were implemented, namely Dodd-Frank, the pace of change in the capital markets has continuously accelerated with stricter regulatory...
2 days ago
The Practical Quant wrote a new blog post titled A scalable time-series database that supports SQL
[A version of this post appears on the O'Reilly Radar.]The O’Reilly Data Show Podcast: Michael Freedman on TimescaleDB and scaling SQL for time-series.Subscribe to the O’Reilly Data Show Podcast to explore the opportunities and techniques driving big data, data science, and AI. Find us on Stitcher, TuneIn, iTunes, SoundCloud, RSS.In this episode of the Data Show, I spoke with Michael Freedman, CTO of Timescale and professor of computer science at Princeton University. When I first heard that Freedman and his collaborators were building a time-series database, my immediate reaction was: “Don’t...
2 days ago
The Bank for International Settlements wrote a new blog post titled Implementing the countercyclical capital buffer
Press release about the Basel Committee publishing a range of practices in implementing the countercyclical capital buffer policy (22 June 2017).
2 days ago
The Reformed Broker wrote a new blog post titled Hot Links: Surrender
What I'm reading this morning ...
2 days ago
Journal of Finance wrote a new blog post titled The Macroeconomics of Shadow Banking
ABSTRACT We build a macro‐finance model of shadow banking—the transformation of risky assets into securities that are money‐like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision, boosting asset prices and growth, but also building up fragility. A rise in uncertainty raises shadow banking spreads, forcing financial institutions to switch to collateral‐intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices and investment fall. The...
2 days ago
Journal of Finance wrote a new blog post titled Matching Capital and Labor
ABSTRACT We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. The firm's decision to reallocate capital amongst its mutual fund managers adds at least $474,000 a month, which amounts to over 30% of the total value added of the industry. We provide evidence that this additional value added results from the firm's private information about the skill of its managers. The firm captures this value because investors reward the firm following a capital reallocation decision by allocating additional capital to the firm's funds.
2 days ago
Journal of Finance wrote a new blog post titled A Model of Monetary Policy and Risk Premia
ABSTRACT We develop a dynamic asset pricing model in which monetary policy affects the risk premium component of the cost of capital. Risk‐tolerant agents (banks) borrow from risk‐averse agents (i.e., take deposits) to fund levered investments. Leverage exposes banks to funding risk, which they insure by holding liquidity buffers. By changing the nominal rate the central bank influences the liquidity premium, and hence the cost of taking leverage. Lower nominal rates make liquidity cheaper and raise leverage, resulting in lower risk premia and higher asset prices, volatility, investment, and...
2 days ago
Quantitative Finance at arXiv wrote a new blog post titled Singular Fourier-Pad\'e Series Expansion of European Option Prices. (arXiv:1706.06709v1 [q-fin.CP])
We apply a new numerical method, the singular Fourier-Pad\'e (SFP) method invented by Driscoll and Fornberg (2001, 2011), to price European-type options in L\'evy and affine processes. The motivation behind this application is to reduce the inefficiency of current Fourier techniques when they are used to approximate piecewise continuous (non-smooth) probability density functions. When techniques such as fast Fourier transforms and Fourier series are applied to price and hedge options with non-smooth probability density functions, they cause the Gibbs phenomenon; accordingly, the techniques...
2 days ago
Quantitative Finance at arXiv wrote a new blog post titled Market Efficiency and Growth Optimal Portfolio. (arXiv:1706.06832v1 [q-fin.PM])
The paper predicts an Efficient Market Property for the equity market, where stocks, when denominated in units of the growth optimal portfolio (GP), have zero instantaneous expected returns. Well-diversified equity portfolios are shown to approximate the GP, which explains the well-observed good performance of equally weighted portfolios. The proposed hierarchically weighted index (HWI) is shown to be an even better proxy of the GP. It sets weights equal within industrial and geographical groupings of stocks. When using the HWI as proxy of the GP the Efficient Market Property cannot be easily...
2 days ago
Quantitative Finance at arXiv wrote a new blog post titled Stop-loss and Leverage in optimal Statistical Arbitrage with an application to Energy market. (arXiv:1706.07021v1 [q-fin.PM])
In this paper we develop a statistical arbitrage trading strategy with two key elements in hi-frequency trading: stop-loss and leverage. We consider, as in Bertram (2009), a mean-reverting process for the security price with proportional transaction costs; we show how to introduce stop-loss and leverage in an optimal trading strategy. We focus on repeated strategies using a self-financing portfolio. For every given stop-loss level we derive analytically the optimal investment strategy consisting of optimal leverage and market entry/exit levels. First we show that the optimal strategy a' la...
2 days ago