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“Private Banker”

February 20, 2018 by The Reformed Broker   Comments (0)

I find fancy investment advice and fancy products to be problematic in and of themselves, regardless of how many disclosures are made in the sales process. ...

Market Impact in a Latent Order Book. (arXiv:1802.06101v1 [q-fin.TR])

February 19, 2018 by Quantitative Finance at arXiv   Comments (0)

We revisit the classical problem of market impact through the lens of a new
agent-based model. Drawing from the mean-field approach in Statistical
Mechanics and Physics, we assume a large number of agents interacting in the
order book. By taking the 'continuum' limit we obtain a set of nonlinear
differential equations, the core of our dynamical theory of price formation.
And we explicitly solve them using Fourier analysis. One could talk as well of
a "micro-macro" approach of equilibrium, where...

Simple Bounds for Transaction Costs. (arXiv:1802.06120v1 [q-fin.PM])

February 19, 2018 by Quantitative Finance at arXiv   Comments (0)

Using elementary arguments, we derive $\L_{p}$-error bounds for the
approximation of frictionless wealth process in markets with proportional
transaction costs. For utilities with bounded risk aversion, these estimates
yield lower bounds for the frictional value function, which pave the way for
its asymptotic analysis using stability results for viscosity solutions. Using
tools from Malliavin calculus, we also derive simple sufficient conditions for
the regularity of frictionless optimal...

How local in time is the no-arbitrage property under capital gains taxes ?. (arXiv:1802.06386v1 [q-fin.PM])

February 19, 2018 by Quantitative Finance at arXiv   Comments (0)

In frictionless financial markets, no-arbitrage is a local property in time.
This means, a discrete time model is arbitrage-free if and only if there does
not exist a one-period-arbitrage. With capital gains taxes, this equivalence
fails. For a model with a linear tax and one non-shortable risky stock, we
introduce the concept of robust local no-arbitrage (RLNA) as the weakest local
condition which guarantees dynamic no-arbitrage. Under a sharp dichotomy
condition, we prove (RLNA). Since...

Pricing Options with Exponential Levy Neural Network. (arXiv:1802.06520v1 [q-fin.PR])

February 19, 2018 by Quantitative Finance at arXiv   Comments (0)

In this paper, we propose the exponential Levy neural network (ELNN) for
option pricing, which is a new non-parametric exponential Levy model using
artificial neural networks (ANN). The ELNN fully integrates the ANNs with the
exponential Levy model, a conventional pricing model. So, the ELNN can improve
ANN-based models to avoid several essential issues such as unacceptable
outcomes and inconsistent pricing of over-the-counter products. Moreover, the
ELNN is the first applicable non-parametric...

Deviations from Covered Interest Rate Parity

February 19, 2018 by Journal of Finance   Comments (0)

ABSTRACT
We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on...

Margin Requirements and the Security Market Line

February 18, 2018 by Journal of Finance   Comments (0)

ABSTRACT
Between 1934 and 1974, the Federal Reserve changed the initial margin requirement for the U.S. stock market 22 times. I use this variation to show that investors' leverage constraints affect the pricing of risk. Consistent with the theoretical predictions of Frazzini and Pedersen (2014), I find that tighter leverage constraints result in a flatter relation between betas and expected returns. My results provide strong empirical support for the idea that the constraints investors face...

Strict local martingales and optimal investment in a Black–Scholes model with a bubble

February 18, 2018 by Mathematical Finance   Comments (0)

Abstract
There are two major streams of literature on the modeling of financial bubbles: the strict local martingale framework and the Johansen–Ledoit–Sornette (JLS) financial bubble model. Based on a class of models that embeds the JLS model and can exhibit strict local martingale behavior, we clarify the connection between these previously disconnected approaches. While the original JLS model is never a strict local martingale, there are relaxations that can be strict local martingales and...

Backward SDEs for control with partial information

February 18, 2018 by Mathematical Finance   Comments (0)

Abstract
This paper considers a non‐Markov control problem arising in a financial market where asset returns depend on hidden factors. The problem is non‐Markov because nonlinear filtering is required to make inference on these factors, and hence the associated dynamic program effectively takes the filtering distribution as one of its state variables. This is of significant difficulty because the filtering distribution is a stochastic probability measure of infinite dimension, and therefore the...