The following collection of essays are linked by one theme, uncertainty. The dynamic nature of financial markets and trading, as with the rest of social sciences, where changes can be observed and decisions can be taken by participants to influence the system, means that along with better models and predictive technologies, predictions need to be continuously revised; and yet unintended consequences set in. While a detailed axiomatic approach to uncertainty and unintended consequences is postponed for another time (or perhaps another lifetime), the present assortment has the following elements:1. Dynamic Multi-Factor Bid-Offer Adjustment ModelWe develop a simple model to incorporate a feedback loop into a financial system and review other situations where such an approach might be effective. This sets the stage for the next parts by illustrating how efforts at dealing with uncertainty can be improved by feedback loops or a continuous review of the system coupled with continued corrective action. The test results show how this can be immediately relevant to a real life setting.2. David vs Goliath (You against the Markets)We develop a set of stochastic dynamic programming models that seek to separate the effect of one's actions in a financial market from the actions of other players. Such a separation brings about a reduction in complexity since participants can better plan their course of action based on a greater focus on the set of controls and states that hold greater significance for their destiny while being cognizant of the implications of the actions of the rest of the participants.3. A Tale of Two Consequences We apply the methodology from part [enu:David-vs-Goliath] to a recent event in financial markets (TOPIX 100 tick size changes on the Tokyo Stock Exchange in 2014) and illustrate how the ability to understand the impact of one's actions in isolation to the actions of others can perhaps lead to more insightful results.4. Hong Kong - Shanghai Connect/Hong Kong - Beijing Disconnect (?) This case study applies the methodology from part [enu:David-vs-Goliath] to another recent event in financial markets (the opening of the Hong Kong Shanghai Connect, connecting the stock exchanges in the two cities in 2014) and illustrates a comparative approach at studying complex systems that perhaps can be one way to overcome a seemingly unsurmountable obstacle, that is, the lack of data.5. Microstructure under the MicroscopeWe consider a measure of similarity, the Bhattacharyya distance, across distributions of variables. We illustrate a novel methodology based on the marriage between the Bhattacharyya distance and the Johnson Lindenstrauss Lemma, a technique for dimension reduction, providing us with a simple yet powerful tool that allows comparisons between data-sets representing any two distributions. The degree to which different markets or sub groups of securities have different measures of their corresponding distributions tells us the extent to which they are different. This can aid investors looking for diversification or looking for more of the same thing. We briefly discuss how this methodology lends itself to numerous Marketstructure studies and even applications outside the realm of finance/social sciences.6. Securities Lending StrategiesWe develop a valuation methodology and corresponding bidding strategies for exclusive auctions as related to the securities lending industry, a less explored yet profit laden area of financial services. This part is orthogonal to the other portions in the sense that it illustrates how the application of even simple econometric techniques can reduce uncertainty and prove to be rewarding.Each part is meant to be self contained, though at times we refer the reader to different sections for a more detailed exposition on a particular sub topic. We regret any inconvenience that this loss of continuity might bring, but hope that this makes for a more concise presentation. There is a list of references and an appendix for each part where other relevant papers, graphical aids, results of statistical tests and proofs are given and linked into the narrative.
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May 5, 2016
Freda Werdiger + 2
Open Access
