Modelling Feedback Effects with Stochastic Liquidity PDF Download

Author: Angelika Esser
Publisher:
ISBN:
Category :
Languages : en
Pages : 23

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Book Description
This paper investigates the interactions between stock price movements, the trading strategies of a large trader, and liquidity. Our framework generalizes the model of Frey by introducing a stochastic liquidity factor. We derive a formula for the feedback effect of the large investor's trading strategy and examine the feedback effects on stock prices for positive and contrarian trading strategies. Features of our model are illustrated using Monte Carlo simulation. The main contribution of this paper is the examination of the price process in an economy with stochastic liquidity, such that liquidity shocks can be captured and their consequences can be analyzed. We observe significant liquidity feedback effects on both the price process of the underlying and the trading strategy of the large investor.

Author: Angelika Esser
Publisher:
ISBN:
Category :
Languages : en
Pages : 23

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Book Description
We model the interactions between the trading activities of a large investor, the stock price and the market liquidity. Our framework generalizes the model of Frey (2000), where liquidity is constant by introducing a stochastic liquidity factor. This innovation has two implications. First, we can analyse trading strategies for the large investor that are affected by a changing market depth. Second, the sensitivity of stock process to the trading strategy of the large investor can vary due to changes in liquidity. Features of our model are demonstrated using Monte Carlo simulation for different scenarios. The flexibility of our framework is illustrated by an application that deals with the pricing of a liquidity derivative. The claim under consideration compensates a large investor who follows a stop loss strategy for the liquidity risk that is associated with a stop loss order. The derivative matures when the asset price falls below a stop loss limit for the first time and then pays the price difference between the asset price immediately before and after the execution of the stop loss order. The setup to price the liquidity derivative is calibrated for one example using real world limit order book data so that one gets an impression about the order of magnitude of the liquidity effect.

Author: Todor Bilarev
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Author: Burkart Mönch
Publisher: Springer Science & Business Media
ISBN: 3540263152
Category : Business & Economics
Languages : en
Pages : 130

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Book Description
The Area of Research and the Object of Investigation In this thesis we will investigate trading strategies in illiquid markets from a market microstructure perspective. Market microstructure is the academic term for the branch of financial economics that investigates trading and the organization of security markets, see, e. g. , Harris (2002). Historically, exchanges evolved as a location, where those interested in buy ing or selling securities could meet physically to transact. Thus, traditionally security trading was organized on exchange floors, where so-called dealers arranged all trades and provided liquidity by quoting prices at which they were willing buy or sell. Consequently, the initial surge of the market mi crostructure literature focused predominantly on this type of market design, which is often referred to as quote-driven. Nowadays, the interest is shifting towards order-driven markets. Beginning with the Toronto Stock Exchange in the mid 1970s and increasing in fre quency and scope, this market structure has emerged as the preeminent form of security trading worldwide. In order-driven markets, exchanges arrange trades by matching public orders, often by employing automatic execution systems. Introduction A major difference between a quote-driven and an order-driven market arises from the transparency pre- and post-trade. The pre-trade transparency con cerns the question whether the order book is visible to the keeper only, or whether it is open to the public.

Author: Angelika Esser
Publisher: Springer Science & Business Media
ISBN: 364217065X
Category : Business & Economics
Languages : en
Pages : 127

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Book Description
In this book, the authors investigate structural aspects of no arbitrage pricing of contingent claims and applications of the general pricing theory in the context of incomplete markets. A quasi-closed form pricing equation in terms of artificial probabilities is derived for arbitrary payoff structures. Moreover, a comparison between continuous and discrete models is presented, highlighting the major similarities and key differences. As applications, two sources of market incompleteness are considered, namely stochastic volatility and stochastic liquidity. Firstly, the general theory discussed before is applied to the pricing of power options in a stochastic volatility model. Secondly, the issue of liquidity risk is considered by focusing on the aspect of how asset price dynamics are affected by the trading strategy of a large investor.

Author: Jeffrey Said
Publisher:
ISBN: 9780549057178
Category :
Languages : en
Pages : 131

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Book Description
It was from Bachelier's now famous Ph.D. thesis of 1900, that the modern discipline of mathematical finance was born. Since its inception, the standard models in classical financial mathematics have specified price dynamics as exogenously given price processes such as Brownian or geometric Brownian motion. This ignores the fact that in general trade size impacts transaction prices and thus tacitly assumes that the size of trades under investigation will be negligibly small as compared to the market volume.

Author: Muhammed Habib Dolgun
Publisher: Walter de Gruyter GmbH & Co KG
ISBN: 3110580152
Category : Business & Economics
Languages : en
Pages : 180

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Book Description
Despite noticeable growth in Islamic banking and finance literature in recent years, very few published books in this area deal with supervisory and regulatory issues in Islamic banking – theoretically or empirically – and none with the critical issue of risks involved in liquidity management of Islamic banks. This unique book is the first of its kind in dealing with challenges these financial institutions face in the absence of interest rate mechanism and debt-based financial instruments. The book examines critically issues involve in managing the risk of liquidity management for these types of institutions, including those stemming from Basel requirements. It then offers an alternative regulatory framework more appropriately suited for such banks without compromising safety and security. The book's unique features and innovative dimensions diagnostically differentiate between Islamic banks and conventional banks as related to liquidity management risks. It proposes a risk-sharing regulatory framework that, once implemented, would mitigate risks posed by balance-sheet mismatches. The book aims to assist regulators, supervisors, Islamic finance practitioners, academicians and other relevant stakeholders.

Author: Mr.Ivo Krznar
Publisher: International Monetary Fund
ISBN: 1484303636
Category : Business & Economics
Languages : en
Pages : 49

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Book Description
Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model. The framework has numerous applications that can strengthen stress testing and macro financial analysis. Moreover, it provides an avenue for many extensions that address the challenges of incorporating other second-round effects important for comprehensive systemic risk analysis, such as interactions between solvency, liquidity and contagion risks. To this end, the paper presents some preliminary simulations of feedback effects arising from the link between the liquidity and solvency risk.

Author: Mr.Andreas A. Jobst
Publisher: International Monetary Fund
ISBN: 1475597290
Category : Business & Economics
Languages : en
Pages : 56

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Book Description
Bank liquidity stress testing, which has become de rigueur following the costly lessons of the global financial crisis, remains underdeveloped compared to solvency stress testing. The ability to adequately identify, model and assess the impact of liquidity shocks, which are infrequent but can have a severe impact on affected banks and financial systems, is complicated not only by data limitations but also by interactions among multiple factors. This paper provides a conceptual overview of liquidity stress testing approaches for banks and discusses their implementation by IMF staff in the Financial Sector Assessment Program (FSAP) for countries with systemically important financial sectors over the last six years.

Author: Hyun Song Shin
Publisher: Oxford University Press
ISBN: 0199546363
Category : Business & Economics
Languages : en
Pages : 205

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Book Description
This book presents the Clarendon Lectures in Finance by one of the leading exponents of financial booms and crises. It explains why the recent global financial crisis erupted in an era when risk management was at the core of the most sophisticated financial institutions.