Market Quotes Research Articles

Libor Market Model with Stochastic Basis - Calibration Using OIS Yield and Money Market Basis Spreads

Usually a Libor Market model with a stochastic basis as speci ed for instance by Mercurio, F. (2009) lacks of a suitable calibration since there are not enough market quotes available. To this end we suggest to take a low parametric model which essentially is calibrated to the current OIS curve. Then, for the forwards we use a Libor Market model for which enough quoted instruments such as caps, swaptions, CMS or CMS spread options are available. The dependency of the OIS curve and the Libor model is given by the money market basis spread.The idea for taking a low factor model for the OIS dynamic is presented in Mercurio, F. and Xie, Z. (2012). But they also propose to use a low factor model for the forwards. In this note we combine a low factor dynamic for the OIS zero coupon bonds with the framework presented in Mercurio, F. (2009) for a multi-curve Libor Market model by a somewhat di erent modelling approach.We show how to obtain all model parameters and for the rst time an example of a calibration of a multi-curve Libor Market model using the current market quotes.

Freight options: Price modelling and empirical analysis

This paper discusses an extension of the traditional lognormal representation for the risk neutral spot freight rate dynamics to a diffusion model overlaid with jumps of random magnitude and arrival. Then, we develop a valuation framework for options on the average spot freight rate, which are commonly traded in the freight derivatives market. By exploiting the computational efficiency of the proposed pricing scheme, we calibrate the jump diffusion model using market quotes of options on the trip-charter route average Baltic Capesize, Panamax and Supramax Indices. We show that the jump-extended setting yields important model improvements over the basic lognormal setting.

On the Extended Girsanov Principle for GARCH Models and Their Diffusion Limits

This paper investigates the weak convergence of general non-Gaussian GARCH models together with an application to the pricing of European style options determined using an extended Girsanov principle and a conditional Esscher transform as the pricing kernel candidates. Applying these changes of measure to asymmetric GARCH models sampled at increasing frequencies, we obtain two risk neutral families of processes which converge to different bivariate diffusions, which are no longer standard Hull-White stochastic volatility models. Regardless of the innovations used, the GARCH implied diffusion limit based on the Esscher transform can be obtained by applying the minimal martingale measure under the physical measure. However, we further show that for skewed GARCH driving noise, the risk neutral diffusion limit of the extended Girsanov principle exhibits a non-zero market price of volatility risk which is proportional to the market price of the equity risk, where the constant of proportionality depends on the skewness and kurtosis of the underlying distribution. Our theoretical results are further supported by numerical simulations and a calibration exercise to observed market quotes.

Implied liquidity: Model sensitivity

The concept of implied liquidity originates from the conic finance theory and more precisely from the law of two prices where market participants buy from the market at the ask price and sell to the market at the lower bid price. The implied liquidity λ of any financial instrument is determined such that both model prices fit as well as possible the bid and ask market quotes. It reflects the liquidity of the financial instrument: the lower the λ, the higher the liquidity. The aim of this paper is to study the evolution of the implied liquidity pre- and post-crisis under a wide range of models and to study implied liquidity time series which could give an insight for future stochastic liquidity modeling. In particular, we perform a maximum likelihood estimation of the CIR, Vasicek and CEV mean-reverting processes applied to liquidity and volatility time series. The results show that implied liquidity is far less persistent than implied volatility as the liquidity process reverts much faster to its long-run mean. Moreover, a comparison of the parameter estimates between the pre- and post-credit crisis periods indicates that liquidity tends to decrease and increase for long and short term options, respectively, during troubled periods.

Patience and Impatience of Stock Traders

An ability to postpone one's execution without penalty provides an important strategic advantage in high-frequency trading. To elucidate competition between traders one has to formulate to a quantitative theory of formation of the execution price from market expectations and quotes. This theory was provided in 2005 by Foucault, Kadan and Kandel. I derive asymptotic distribution of the bids/offers as a function of the ratio of patient and impatient traders using the dynamic version of the Foucault, Kadan and Kandel dynamic Limit Order Book (LOB) model. Dynamic version of the LOB model allows stylized but sufficiently realistic representation of the trading markets. In particular, dynamic LOB allows simulation of the distribution of execution times and spreads from high-frequency quotes. Significant analytic progress is made towards understanding of trading as competition for immediacy of execution between traders. The results are qualitatively compared with empirical volume-at-price distribution of highly liquid stocks.

How to Get the Asset Return Structure and Distribution Under the Presence of Transaction Costs

Various results in economical and financial literature are built without taking into consideration market frictions. For instance, many of the well-known results on asset return structures and distributions do not involve the transaction costs. However any investor is aware that the indexes or market quotes, on which these distributions are based on, do not actually reflect the portfolio return itself if she really closes her position. It means that having at disposal an asset return distribution reflecting the effect of transaction costs may be a valuable and realistic tool in investment management. Our purpose in this work is to show how the available classical results on the asset change distributions can be converted into results on the structure and asset return distributions taking into account the transaction costs. We consider here transaction costs defined by piecewise and affine function, which are really applied by various brokerage firms in Europe. For a given asset, we will derive the structure, moments, distribution functions of the corresponding P&L, return and Loss. The cases of asset return modeled by a Normal Gaussian and Normal Inverse Gaussian (NIG) are considered as illustrative examples. The NIG is especially of interest since it is characterized by the first four moments, on which care are given in many risk management applications.

Implied Liquidity: Model Sensitivity

The concept of implied liquidity originates from the conic finance theory and more precisely from the law of two prices where market participants buy from the market at the ask price and sell to the market at the lower bid price. The implied liquidity lambda of any financial instrument is determined such that both model prices fit as well as possible the bid and ask market quotes. It reflects the liquidity of the financial instrument: the lower the lambda, the higher the liquidity. The aim of this paper is to study the evolution of the implied liquidity pre- and post crisis under a wide range of models and to study implied liquidity time series which could give insight for future stochastic liquidity modelling. In particular, we perform a maximum likelihood estimation of the CIR and Vasicek mean-reverting processes applied to liquidity and volatility time series. The results show that implied liquidity is far less persistent than implied volatility. Moreover, a comparison of the parameter estimates between the pre- and post credit crisis periods indicates that liquidity tends to decrease and increase for long and short term options, respectively, during troubled periods.

An empirical comparative analysis of foreign exchange smile calibration procedures

Very little is known in the academic literature about the construction of the implied volatility smile in foreign exchange over-the-counter derivative markets. These markets have adapted to foreign exchange-specific quotation mechanisms where the volatility smile is given implicitly, through market quotes, rather than explicitly. The resulting smile setup problem requires a numerical calibration procedure where various interpolation functions can be used.We will introduce different calibration setups and compare them empirically with respect to their computational robustness, well-posedness of the calibration setup, extrapolation behavior and ability to produce volatility smiles consistent with no-arbitrage conditions. We find that the simplified parabolic interpolation is the most suitable calibration method. Finally, we analyze potential smile construction problems in the presence of extreme market scenarios.

Assessing Usage And Maximizing Finance Lab Impact: A Case Exploration

This paper reports the results of a survey conducted to assess students’ usage and perceptions of a finance lab. Finance labs differ from simple computer labs as they typically contain data boards, streaming market quotes, terminals and software that allow for real-time financial analyses. Despite the fact that such labs represent significant and ongoing investments in the learning environment, the results of the survey show that students value finance labs, but fail to maximize their use. Recommendations are made to address this situation.

Do private firm valuations contain incremental information content over routine analyst valuations?

In this study, we seek to investigate whether private expert valuations commissioned for specific transactions outside the exchange contain incremental information content over public analyst valuations published routinely by investment houses. First, we find that public valuations are based to a larger extent on financial statements and market quotes, whereas private valuations tend to be based on other, non-public information. Second, we show that investors’ response to both public and private valuations is cautious in the short-run as well as in the long-run. Third, we provide evidence that despite the fact that private valuations have the advantage of time, human resources, and better access to non-public information, they do not provide different results than those obtained from public valuations. We conclude that while private valuations may be captured as more accurate and reliable, their superiority over public valuations is questionable at best.

How much is that security worth? Valuation issues and recommendations for hedge fund advisers post‐registration

Every month, many hedge fund managers grapple with a fundamental conflict of interest. The conflict arises when a fund manager, whose compensation is based on fund performance, is charged with determining the value of the complex or illiquid securities in his portfolio. These securities often do not receive reliable market quotes, and may be difficult to value. Accordingly, a fund manager may be tempted to misprice the hard‐to‐price names in his account in order to bolster fund performance, and increase his own compensation. The situation is somewhat analogous to a chief financial officer calculating his corporation’s profits, all the while knowing that his calculations will affect his bonus. Change, however, is on the horizon. On December 2, 2004, the United States Securities and Exchange Commission (“SEC” or “Commission)” amended the Investment Advisers Act of 1940 (“Advisers Act)” to require certain hedge fund advisers to register with the Commission (the “Rule)”. Under the Rule, registered hedge fund advisers will be required to make their books available to SEC examiners by February 1, 2006, and, in turn, subject their valuation methods and policies to regulatory scrutiny.

Scientific market quote - SMW stock hits new high!

Scientific market quote - SMW stock hits new high!

Pricing Kernels and Dynamic Portfolios

We investigate the structure of the pricing kernels in a general dynamic investment setting by making use of their duality with the self financing portfolios. We generalize the variance bound on the intertemporal marginal rate of substitution introduced in Hansen and Jagannathan (1991) along two dimensions, first by looking at the variance of the pricing kernels over several trading periods, and second by studying the restrictions imposed by the market prices of a set of securities. The variance bound is the square of the optimal Sharpe ratio which can be achieved through a dynamic self financing strategy. This Sharpe ratio may be further enhanced by investing dynamically in some additional securities. We exhibit the kernel which yields the smallest possible increase in optimal dynamic Sharpe ratio while agreeing with the current market quotes of the additional instruments.

Price-Time Priority, Order Routing, and Trade Execution Costs in NYSE-listed Stocks

Trade execution costs are lower when market centers use quotations to compete for order flow as compared to when orders are routed to market centers with non-competitive quotes. Execution costs for trades completed off the NYSE when the executing market quote is competitive are virtually the same as for matched trades completed at the NYSE. In contrast, costs for off-NYSE trades competed when executing market quotes are not competitive are 1.1 to 1.6 cents per share worse than for matched NYSE trades. Quote characteristics, including size, time priority, and proximity to the inside, significantly affect observed execution venue, indicating a substantial degree of quote-based competition for order flow. However, trade characteristics, including trade size and information content, also affect trade venue. NYSE quotes have or share price priority at either the bid or offer over 99% of the time, and at both the bid and offer 89% of time. NYSE quotes have time priority over 80% of the time. However, an off-NYSE quote virtually always (95.4% of the time) matches the best NYSE quote on at least one side of the market, and occasionally (about 11% of the time) establishes one side of the best quotes without NYSE participation.

Market Quote and Spread Component Cost Behavior Around Trading Halts for Stocks Interlisted on the Montreal and Toronto Stock Exchanges

AbstractWe use intraday quotes and transactions on halted securities that interlisted on the Toronto Stock Exchange and Montreal Exchange to decompose the spreads and examine quote depths. Our results show that order‐processing costs differ for trading halts at the open compared to halts during the rest of the trading day. We find that the adverse‐selection cost component of the spread is higher around trading halts and highest at the trading halt. We also find that print‐media articles that appear within the four‐day window centered on the halt have no impact on the time‐series behavior of the spread cost.

The Effects of Opening and Closing Procedures on the NYSE and Nasdaq

We study the effects of opening and closing procedures on the NYSE and Nasdaq by examining firms that moved from the Nasdaq to the NYSE and a sample of size-matched firms. We find that opening trades on the NYSE are about 20 percent less costly to execute than later comparable trades, while closing trades are slightly more costly. On the Nasdaq, both opening and closing trades are slightly more costly. The savings on the NYSE open are increasing with the size of firms. While the consolidation of orders at the NYSE opening auction appears to reduce costs, we also find that opening quotes are subject to temporary price pressures though transaction prices appear to be unaffected. At the close, NYSE trades obtain comparable executions and quotes do not appear to be distorted. However, closing trades appear to be affected by temporary liquidity pressures, particularly market-on-close orders. We find that price discovery overnight and through the first half hour of trading is comparable across both market systems. However, price discovery is more pronounced in the earlier part of the rest of the day on the NYSE. Also, opening quotes are delayed as NYSE specialists complete opening auctions, thus delaying price discovery during the first half hour of trading. Finally, we find that the official closing quote on the NYSE reflects more information than quotes prevailing at end of the day, the last third market quote, either of the last two transactions of the day, or the very last quote provided for a given stock.

Calibrating Libor Market Models

The Libor Market Models arise from the general multi-factor Heath-Jarrow-Morton interest rate model. The Libor Market Models assume that, say, 3 months simple rates are log-normal. With pricing formulae for caps/floors and swaptions this makes the model easy to calibrate for a specific choice of volatility function. We describe how to calibrate the model using a non-parametric volatility function. We apply a smoothness criteria to the quality of fit used in calibration as erratic volatilities otherwise result from the calibration. We perform numerical studies using real market data from several markets to check the robustness of the implementation towards changes in model/calibration parameters. The implementation is indeed very robust and market quotes are matched within bid-offer spread.

Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread

By considering investor order placement strategy, this paper demonstrates that transaction costs cause bid-ask spreads to be an equilibrium property of asset markets. With transaction costs, the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote; thus, with certainty of execution at the counterpart market quote, a "gravitational pull" is generated that keeps counterpart quotes from being placed infinitesimally close to each other. An equilibrium spread is defined and its size linked to market thinness; implications are noted for the design of a trading system.