Statistical Properties of MRW Process
In order to demonstrate distinctive feature of MRW process, one can compare its realization with realization of geometric Brownian motion (original random walk model of Bachelier), which sample increments and …
On Some Approaches to Managing Market Risk Using VaR Limits: A Note
Alexey Lobanov Abstract Market risk has been traditionally considered in a single-period setting, with fixed positions in a static portfolio and losses caused by price volatility over a specified time …
Time-Warped Longest Common Subsequence (T-WLCS)
The basic idea is to unite both DTW and LCSS approaches (Guo and Siegelmann 2004) f 0, _if _i = 0 _or_j = 0 cij = max {a-i, j, ci, …
The Daniels Model (2003)
The first example of this model was presented in Daniels et al. (2003). After that there were a few papers published with an analysis of this model (Farmer et al. …
Empirical Description of Markets Around Shocks
A broad range of research works tries to give an empirical description for price jumps and analyze their statistical properties and the behaviour of market quantities around such events. The …
Risk Myopia and Disruptive Information
How could markets have been so blind for so long? Credit markets appeared to have outsourced credit risk assessment the ratings agencies, who were asleep at the wheel, not to …
How to Evaluate the Impact of HFT on Particular Aspects of Market Liquidity?
In general, market liquidity can be defined as ability to trade when you want to trade (Harris 2002). To be more specific, a liquid market can be described as a …
The Mike-Farmer Model Without the Cancellation Process (MFWC)
It is an interesting question about what there would be on the market if there were no cancellations. Would trading or the market be stable or not? We realize the …
Spread Modelling Under Asymmetric Information
Sergey Kazachenko Abstract Bid-ask spread is a key measure of pricing efficiency in a microstructure framework. Today there is no universal model of spread formation that includes all three factors …
Cross Asset Class ETF Analysis
StressGrades time series can help us visualize the interrelationship between risk themes. Figure 16 represents major stress themes using ETFs. Observe the sequential cascading of systemic risk starting with the …
Key Drivers of Default
According to the mortgage literature, the key determinants of default initially include observable socio-demographic characteristics, terms of the mortgage contract, mortgage characteristics, and macroeconomic conditions. Terms of a credit contract …
Literature Review
Most of the studies about tick size present in the literature are case studies of the impact of a reduction of tick size on market quality, i. e. on microstructural …
Calibration of the Model
One of the most important issues for the practical applications is the estimation of the three unknown parameters of MRW model (ct, A, L) with the real data. The parameter …
Trading Strategy as a “Shadow” Part of Market Risk
When considering the contribution of a trading strategy to the overall risk of the position, we need to examine what determines a trader’s attitude to risk. Admittedly, traders have a …
Time Series Temporality: Rogov-Causality Test
By an analogy with the Granger-causality test, the author has developed the following temporality test (Rogov-causality): Assume that Z = LCS (X, Y) : Zi = 7, = Xti+lagi, i …
Social Diffusion of Disruptive Information
As we have described, social imitation is an important amplifier in markets. As in fashion, new themes constantly emerge and some cross critical points to broad adoption due to social …
The Synergy of Rating Agencies’ Efforts Russian Experience
Alexander Karminsky Abstract We examine the synergy of the credit rating agencies’ efforts. This question is important not only for regulators, but also for commercial banks if the implementation of …
Innovation Comes from the Periphery
It therefore makes sense that innovative insights often emerge from the periphery, free from the pressures of groupthink. Michael Lewis explores this theme in his bestselling “The Big Short: Inside …
Application of Copula Models for Modeling One-Dimensional Time Series
Vadim Onishchenko and Henry Penikas Abstract This paper proposes method of detecting a structural break/shift in time series such as AR(1) with a nonlinear dependence structure of lagged value and …
Quality Analysis of the Models
Stylized facts are a good test for the identification of model quality, but another important aspect is parity of basic market characteristics: 1. Returns. It is a well-known fact that …
Distinguishing Features of Glosten and Milgrom Model Modification
There are numerous studies devoted to analysis of changing or relaxing assumptions of the GM model. Back and Baruch (2004) investigate relations between two major models of market mircostructure: the …
False Positives
When considering market based early warning signals, the million dollar question how often we get false positives (type I errors). Despite Paul Samuelson’s famous quip that the “stock market has …
Global Risk Factor Theory and Risk Scenario Generation Based on the Rogov-Causality Test of Time Series Time-Warped Longest Common Subsequence
Mikhail Rogov Abstract The paper is concerned with the global risk factor theory and the Rogov - causality test of time-warped longest common subsequence for risk management purposes, including the …
Empirical Analysis
In this section we study the role of the effective tick size on the distributional properties of price changes and log-returns at different time scales. We make use of two …
Adaptive Stress Testing: Amplifying Network Intelligence by Integrating Outlier Information (Draft 16)
Alan Laubsch The future is already here. It’s just not evenly distributed yet. (William Gibson) Abstract This essay examines lessons from systemic breakdowns, and presents a framework for Adaptive Stress …
The Role of VaR Limits in Risk Budgeting
In market risk management, limit setting is driven by economic capital allocation, and is normally conducted from the top-down. Economic capital is viewed as an internal solvency constraint on a …
Time Series Clustering
For risk benchmarking, the user of the website is provided with tools for hierarchical clustering by various methods on the basis of time series data mining, with the use of …
Comparison of the Ratings: Literature and Practice Overview
The process of rating assignment is similar for different international rating agencies. Frequently, agencies publish their methodologies. However, they do not include detailed information, but rather general directions for rating …
Cycle of Hidden vs. Visible Risk
Hidden risk suddenly becomes visible risk similar to the way a spring’s potential energy is released as kinetic energy. Until February 2007, banks were considered rock solid (despite record debt …
Generation of Time Series
This section describes how to generate a time series such as AR(1) with non-linear structure of dependence, defined by using a two-dimensional copula C(u, v). The series is stationary, but …
Construction and Backtesting of a Multi-Factor Stress-Scenario for the Stock Market
Kirill Boldyrev, Dmitry Andrianov, and Sergey Ivliev Abstract Nowadays stress-testing is a popular framework for the analysis of the financial stability of different markets’ institutes and objects. This work proposes …
Unknown Real Asset Value and Informed Traders’ Errors During the Trading Process
Our GM model extension is divided into two stages. During the first stage, the market-maker loses its knowledge about possible real asset value, while conditions for informed and uninformed traders …
Adaptive Stress Testing Visualizations
Visualization is a crucial component to Adaptive Stress Testing. Visualization draws attention on emerging risks, and can help build intuition on how different risks are interconnected. We can use heatmaps …
The Mechanism of Causal Relationships
Risk interactions play the most important role, because of the existence of close economic, organizational and technological ties between risk owners. The occurrence of some risks (operational, credit, market ones) …
Statistical Models for Large Tick Assets
In this section we present briefly the statistical models recently introduced by Curato and Lillo (2013) describing the high frequency dynamics of price changes for a large tick size asset …
