pwc-archive/papers-with-abstracts huggingface dataset:
Criptocurrencies, Fiat Money, Blockchains and Databases
Authors: Jorge Barrera
Date: 2020-02-04 00:00:00

Two taxonomies of money that include cryptocurrencies are analyzed. A definition of the term cryptocurrency is given and a taxonomy of them is presented, based on how its price is fixed. The characteristics of the use of current fiat money and the operation of two-level banking systems are discussed. Cryptocurrencies are compared with fiat money and the aspects in which the latter cannot be overcome are indicated. The characteristics of blockchains and databases are described. The possible cases of use of both technologies are compared, and it is noted that blockchains, in addition to cryptocurrencies and certain records, have not yet shown their usefulness, while databases constitute the foundation of most of the automated systems in operation.
Behavioral Finance -- Asset Prices Predictability, Equity Premium Puzzle, Volatility Puzzle: The Rational Finance Approach
Authors: Svetlozar Rachev, Stoyan Stoyanov, Stefan Mittnik, Frank J. Fabozzi, Abootaleb Shirvani
Date: 2017-10-09 00:00:00

In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as anomalies the theory of rational finance cannot explain: Predictability of asset returns, The Equity Premium, (The Volatility Puzzle. We offer resolutions of those objections within the rational finance. We do not claim that those are the only possible explanations of the anomalies, but offer statistical models within the rational theory of finance which can be used without relying on behavioral finance assumptions when searching for explanations of those anomalies.
Ownership Structure Variation and Firm Efficiency
Authors: Sallahuddin Hassan, Zalila Othman, Mukaramah Harun
Date: 2020-01-07 00:00:00

Firms with different ownership structures could be argued to have different levels of efficiency.Highly concentrated firms are expected to be more efficient as this type of ownership structure may alleviate the conflict of interest between managers and shareholders.In Malaysia, public-listed firms have been found to have highly concentrated ownership structure.However, whether this evidence holds for every industry has not been established.Hence, the objective of this paper is to investigate whether there are variations in ownership structure and firm's efficiency across sectors.To achieve this objective, the frequency distributions of ownership structure were calculated and firms efficiency scores for consumer products, industrial products, construction and trading/services sectors were measured.Data Envelopment Analysis(DEA) under the assumptions of constant returns to scale(CRS) and variable returns to scale(VRS) was employed to estimate firms efficiency scores.A sample of 156 firms listed on the Kuala Lumpur Stock Exchange(KLSE) was selected using the stratified random sampling method. The findings have shown that there are variations in firm ownership structure and efficiency across sectors.
A review of the Dividend Discount Model: from deterministic to stochastic models
Authors: Guglielmo D'Amico, Riccardo De Blasis
Date: 2020-01-02 00:00:00

This chapter presents a review of the dividend discount models starting from the basic models (Williams 1938, Gordon and Shapiro 1956) to more recent and complex models (Ghezzi and Piccardi 2003, Barbu et al. 2017, D'Amico and De Blasis 2018) with a focus on the modelling of the dividend process rather than the discounting factor, that is assumed constant in most of the models. The Chapter starts with an introduction of the basic valuation model with some general aspects to consider when performing the computation. Then, Section 1.3 presents the Gordon growth model (Gordon 1962) with some of its extensions (Malkiel 1963, Fuller and Hsia 1984, Molodovsky et al. 1965, Brooks and Helms 1990, Barsky and De Long 1993), and reports some empirical evidence. Extended reviews of the Gordon stock valuation model and its extensions can be found in Kamstra (2003) and Damodaran (2012). In Section 1.4, the focus is directed to more recent advancements which make us of the Markov chain to model the dividend process (Hurley and Johnson 1994, Yao 1997, Hurley and Johnson 1998, Ghezzi and Piccardi 2003, Barbu et al. 2017, D'Amico and De Blasis 2018). The advantage of these models is the possibility to obtain a different valuation that depends on the state of the dividend series, allowing the model to be closer to reality. In addition, these models permit to obtain a measure of the risk of the single stock or a portfolio of stocks.
DAY TRADE: across the statistics | DAY TRADE: do outro lado das estatisticas
Authors: Roberto Ernani Porcher Junior
Date: 2019-12-07 00:00:00

This paper questions some current ideas about the practice of specific capital market operations - the so-called day trading operations. The text advanced from theoretical propositions to a detailed analysis of the study entitled "Is it possible to live by day-trading?" (CHAGUE and GIOVANNETTI, 2019), to which it offers a counterpoint. This investigation reveal the existence of important elements that are not yet properly weighed in the treatment of the current theme, leading to loss of dimensions that are - or should be - inseparable from this type of research. The conclusion reached is that the existing scientific evidence does not show that the adoption of the day trade as an occupation is economically unsustainable, nor does it prove the impossibility of evolution of the day traders' operational performance over time. ----- O presente trabalho coloca em questionamento algumas ideias atualmente difundidas sobre a pratica de operacoes especificas do mercado de capitais - as chamadas operacoes day trade. Partindo de proposicoes teoricas, o texto avanca a uma analise detalhada do estudo intitulado "E possivel viver de day-trading?" (CHAGUE e GIOVANNETTI, 2019), ao qual oferece contraponto. Essa investigacao revela a existencia de importantes elementos que ainda nao estao devidamente sopesados no tratamento do tema em voga, acarretando perda de dimensoes que sao - ou deveriam ser - indissociaveis desse tipo de pesquisa. A conclusao alcancada e de que as evidencias cientificas ate entao existentes nao demonstram que a adocao do day trade como profissao seja insustentavel economicamente, nem comprovam a impossibilidade de evolucao da performance operacional dos day traders ao longo do tempo.
Stylized Facts and Agent-Based Modeling
Authors: Simon Cramer, Torsten Trimborn
Date: 2019-12-02 00:00:00

The existence of stylized facts in financial data has been documented in many studies. In the past decade the modeling of financial markets by agent-based computational economic market models has become a frequently used modeling approach. The main purpose of these models is to replicate stylized facts and to identify sufficient conditions for their creations. In this paper we introduce the most prominent examples of stylized facts and especially present stylized facts of financial data. Furthermore, we given an introduction to agent-based modeling. Here, we not only provide an overview of this topic but introduce the idea of universal building blocks for agent-based economic market models.
Assessment of Financial Potential as a Determinant of Enterprise Development
Authors: Dmytro Zherlitsyn, Stanislav Levytskyi, Denys Mykhailyk, Victoriia Ogloblina
Date: 2019-12-01 00:00:00
Tasks: Management

Financial potential is an important part of enterprise activities. The technique of the enterprise's financial potential assessment is offered in the paper. It is presented by particular stages, where each stage is related to a certain task. The characteristics of the company's financial potential, based on the analysis of the related literature, are determined. The implementation of each task is carried out. Thus, the study proposes a mechanism for managing the financial potential of enterprises, which allows to emphasize the elements that can be useful for economic development. It is based on the general strategic principles of the enterprise management. The study results can be used to assess enterprise purposes and develop the formation goals of its financial potential. It can also help to forecast and separate main directions of accumulation, formation, and distribution of financial resources. It should be noted, that analysis and control over the financial potential formation strategy, as well as the use of analysis results for specifying the strategic directions of the enterprise development, are of high importance. Therefore, the management of the financial potential is a system of rational management of business financing, which includes the formation of financial relations, emerging as a result of finance resources flow.
Dynamic Term Structure Models for SOFR Futures
Authors: Jacob Bjerre Skov, David Skovmand
Date: 2021-03-20 00:00:00

The LIBOR rate is currently scheduled for discontinuation, and the replacement advocated by regulators in the US is the Secured Overnight Financing Rate (SOFR). The change has the potential to disrupt the $200 trillion market of derivatives and debt tied to the LIBOR. The only SOFR linked derivative with any significant liquidity and trading history is the SOFR futures contract, traded at the CME since 2018. We use the historical record of futures prices to construct dynamic arbitrage-free models for the SOFR term structure. The models allow you to construct forward-looking SOFR term rates, imply a SOFR discounting curve and price and risk and risk manage SOFR derivatives, not yet liquidly traded in the market. We find that a standard three-factor Gaussian arbitrage-free Nelson-Siegel model describes term rates very well but a shadow-rate extension is needed to describe the behaviour near the zero-boundary. We also find that the jumps and seasonal effects observed in SOFR, do not need to be specifically accounted for in a model for the futures prices. Finally we study the so-called convexity correction and find that it becomes significant beyond the 2 year maturity. For validation purposes we demonstrate that our model aligns closely with the methodology used by the Federal Reserve to publish indicative SOFR term rates.
Complete and competitive financial markets in a complex world
Authors: Gianluca Cassese
Date: 2020-03-02 00:00:00

We investigate the possibility of completing financial markets in a model with no exogenous probability measure and market imperfections. A necessary and sufficient condition is obtained for such extension to be possible.
Pricing of debt and equity in a financial network with comonotonic endowments
Authors: Tathagata Banerjee, Zachary Feinstein
Date: 2018-10-02 00:00:00

In this paper we present formulas for the valuation of debt and equity of firms in a financial network under comonotonic endowments. We demonstrate that the comonotonic setting provides a lower bound and Jensen's inequality provides an upper bound to the price of debt under Eisenberg-Noe financial networks with bankruptcy costs. Such financial networks encode the interconnection of firms through debt claims. The proposed pricing formulas consider the realized, endogenous, recovery rate on debt claims. Special consideration is given to the CAPM setting in which firms invest in correlated portfolios so as to provide analytical stress testing formulas. We endogenously construct the comonotonic endowment setting from a equity maximizing standpoint with capital transfers. We conclude by, numerically, comparing the network valuation problem with two single firm baseline heuristics which can, respectively, approximate the price of debt and equity.
On an Irreversible Investment Problem with Two-Factor Uncertainty
Authors: Felix Dammann, Giorgio Ferrari
Date: 2021-03-15 00:00:00
Tasks: Vocal Bursts Valence Prediction

We consider a real options model for the optimal irreversible investment problem of a profit maximizing company. The company has the opportunity to invest into a production plant capable of producing two products, of which the prices follow two independent geometric Brownian motions. After paying a constant sunk investment cost, the company sells the products on the market and thus receives a continuous stochastic revenue-flow. This investment problem is set as a two-dimensional optimal stopping problem. We find that the optimal investment decision is triggered by a convex curve, which we characterize as the unique continuous solution to a nonlinear integral equation. Furthermore, we provide analytical and numerical comparative statics results of the dependency of the project's value and investment decision with respect to the model's parameters.
Optimal trade execution under small market impact and portfolio liquidation with semimartingale strategies
Authors: Ulrich Horst, Evgueni Kivman
Date: 2021-03-10 00:00:00

We consider an optimal liquidation problem with instantaneous price impact and stochastic resilience for small instantaneous impact factors. Within our modelling framework, the optimal portfolio process converges to the solution of an optimal liquidation problem with general semimartingale controls when the instantaneous impact factor converges to zero. Our results provide a unified framework within which to embed the two most commonly used modelling frameworks in the liquidation literature and provide a microscopic foundation for the use of semimartingale liquidation strategies and the use of portfolio processes of unbounded variation. Our convergence results are based on novel convergence results for BSDEs with singular terminal conditions and novel representation results of BSDEs in terms of uniformly continuous functions of forward processes.
Continuous-Time Risk Contribution of the Terminal Variance and its Related Risk Budgeting Problem
Authors: Mengjin Zhao, Guangyan Jia
Date: 2020-11-21 00:00:00

To achieve robustness of risk across different assets, risk parity investing rules, a particular state of risk contributions, have grown in popularity over the previous few decades. To generalize the concept of risk contribution from the simple covariance matrix case to the continuous-time case in which the terminal variance of wealth is used as the risk measure, we characterize risk contributions and marginal risk contributions on various assets as predictable processes using the Gateaux differential and Doleans measure. Meanwhile, the risk contributions we extend here have the aggregation property, namely that total risk can be represented as the aggregation of those among different assets and $(t,\omega)$. Subsequently, as an inverse target -- allocating risk, the risk budgeting problem of how to obtain policies whose risk contributions coincide with pre-given risk budgets in the continuous-time case is also explored in this paper. These policies are solutions to stochastic convex optimizations parametrized by the pre-given risk budgets. Moreover, single-period risk budgeting policies are explained as the projection of risk budgeting policies in continuous-time cases. On the application side, volatility-managed portfolios in [Moreira and Muir,2017] can be obtained by risk budgeting optimization; similarly to previous findings, continuous-time mean-variance allocation in [Zhou and Li, 2000] appears to be concentrated in terms of risk contribution.
The Support and Resistance Line Method: An Analysis via Optimal Stopping
Authors: Vicky Henderson, Saul Jacka, Ruiqi Liu, Jun Maeda
Date: 2021-03-03 00:00:00

We study a mathematical model motivated by the support/resistance line method in technical analysis where the underlying stock price transitions between three states of nature in a path-dependent manner. For optimal stopping problems with respect to a general class of reward functions and dynamics, using probabilistic methods, we show that the value function is $C^1$ (with respect to the corresponding scale function) and solves a general free boundary problem. Moreover, for a range of utilities, we prove that the best times to buy and sell the stock are obtained by solving free boundary problems corresponding to two linked optimal stopping problems. We use this to compute optimal trading strategies for several types of dynamics and varying degrees of relative risk aversion.
Defaultable term structures driven by semimartingales
Authors: Sandrine Gümbel, Thorsten Schmidt
Date: 2021-03-02 00:00:00

We consider a market with a term structure of credit risky bonds in the single-name case. We aim at minimal assumptions extending existing results in this direction: first, the random field of forward rates is driven by a general semimartingale. Second, the Heath-Jarrow-Morton approach is extended with an additional component capturing those future jumps in the term structure which are visible from the current time. Third, the associated recovery scheme is as general as possible, it is only assumed to be non-increasing. In this general setting we derive generalized drift conditions which characterize when a given measure is a local martingale measure, thus yielding no asymptotic free lunch with vanishing risk (NAFLVR), the right notion for this large financial market to be free of arbitrage.
Set-Valued Dynamic Risk Measures for Processes and Vectors
Authors: Yanhong Chen, Zachary Feinstein
Date: 2021-03-01 00:00:00

The relationship between set-valued risk measures for processes and vectors on the optional filtration is investigated. The equivalence of risk measures for processes and vectors and the equivalence of their penalty function formulations are provided. In contrast with scalar risk measures, this equivalence requires an augmentation of the set-valued risk measures for processes. We utilize this result to deduce a new dual representation for risk measures for processes in the set-valued framework. Finally, the equivalence of multiportfolio time consistency between set-valued risk measures for processes and vectors is provided; to accomplish this, an augmented definition for multiportfolio time consistency of set-valued risk measures for processes is proposed.
The Pricing of Quanto Options: An empirical copula approach
Authors: Rafael Felipe Carmargo Prudencio, Christian D. Jäkel
Date: 2020-05-06 00:00:00
Tasks: Relation

The quanto option is a cross-currency derivative in which the pay-off is given in foreign currency and then converted to domestic currency, through a constant exchange rate, used for the conversion and determined at contract inception. Hence, the dependence relation between the option underlying asset price and the exchange rate plays an important role in quanto option pricing. In this work, we suggest to use empirical copulas to price quanto options. Numerical illustrations show that the flexibility provided by this approach, concerning the dependence relation of the two underlying stochastic processes, results in non-negligible pricing differences when contrasted to other models.
Pricing Exchange Rate Options and Quanto Caps in the Cross-Currency Random Field LIBOR Market Model
Authors: Rajinda Wickrama
Date: 2021-02-27 00:00:00

We develop an arbitrage-free random field LIBOR market model to price cross-currency derivatives. The uncertainty of the forward LIBOR rates of our cross-currency model is driven by a two time parameter random field instead of a finite dimensional Brownian motion. To demonstrate the applications of this model, we develop an approximate closed-form pricing formula for Quanto caps and cross-currency swaps. Further, we derive an exact pricing formula for an exchange rate option in the random field setting.
Optimal Dynamic Futures Portfolios Under a Multiscale Central Tendency Ornstein-Uhlenbeck Model
Authors: Tim Leung, Yang Zhou
Date: 2021-02-24 00:00:00

We study the problem of dynamically trading multiple futures whose underlying asset price follows a multiscale central tendency Ornstein-Uhlenbeck (MCTOU) model. Under this model, we derive the closed-form no-arbitrage prices for the futures contracts. Applying a utility maximization approach, we solve for the optimal trading strategies under different portfolio configurations by examining the associated system of Hamilton-Jacobi-Bellman (HJB) equations. The optimal strategies depend on not only the parameters of the underlying asset price process but also the risk premia embedded in the futures prices. Numerical examples are provided to illustrate the investor's optimal positions and optimal wealth over time.
The relations of Choquet Integral and G-Expectation
Authors: Ju Hong Kim
Date: 2021-02-20 00:00:00

In incomplete financial markets, there exists a set of equivalent martingale measures (or risk-neutral probabilities) in an arbitrage-free pricing of the contingent claims. Minimax expectation is closely related to the $g$-expectation which is the solution of a certain stochastic differential equation. We show that Choquet expectation and minimax expectation are equal in pricing European type options, whose payoff is a monotone function of the terminal stock price $S_T$.
The equivalent constant-elasticity-of-variance (CEV) volatility of the stochastic-alpha-beta-rho (SABR) model
Authors: Jaehyuk Choi, Lixin Wu
Date: 2019-11-29 00:00:00

This study presents new analytic approximations of the stochastic-alpha-beta-rho (SABR) model. Unlike existing studies that focus on the equivalent Black-Scholes (BS) volatility, we instead derive the equivalent constant-elasticity-of-variance (CEV) volatility. Our approach effectively reduces the approximation error in a way similar to the control variate method because the CEV model is the zero vol-of-vol limit of the SABR model. Moreover, the CEV volatility approximation yields a finite value at a zero strike and thus conveniently leads to a small-time asymptotics for the mass at zero. The numerical results compare favorably with the BS volatility approximations in terms of the approximation accuracy, small-strike volatility asymptotics, and no-arbitrage region.
Bertram's Pairs Trading Strategy with Bounded Risk
Authors: Vladimír Holý, Michal Černý
Date: 2021-02-08 00:00:00

Finding Bertram's optimal trading strategy for a pair of cointegrated assets following the Ornstein--Uhlenbeck price difference process can be formulated as an unconstrained convex optimization problem for maximization of expected profit per unit of time. This model is generalized to the form where the riskiness of profit, measured by its per-time-unit volatility, is controlled (e.g. in case of existence of limits on riskiness of trading strategies imposed by regulatory bodies). The resulting optimization problem need not be convex. In spite of this undesirable fact, it is demonstrated that the problem is still efficiently solvable. In addition, the problem that parameters of the price difference process are never known exactly and are imprecisely estimated from an observed finite sample is investigated (recalling that this problem is critical for practice). It is shown how the imprecision affects the optimal trading strategy by quantification of the loss caused by the imprecise estimate compared to a theoretical trader knowing the parameters exactly. The main results focus on the geometric and optimization-theoretic viewpoint of the risk-bounded trading strategy and the imprecision resulting from the statistical estimates.