Option trading strategies research papers
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Here is a link to my SSRN author profile. Below you will find my working and published papers. We use high-frequency data from the Nasdaq exchange to option trading strategies research papers a measure of volume order imbalance in the limit order book LOB. We show that our measure is a good predictor of the sign of the next market order MOi. Based on these empirical findings, we introduce and calibrate a Markov chain modulated pure jump model of price, spread, LO and MO arrivals, and order imbalance.
As an application of the model, we pose and solve a stochastic control problem for an agent who maximizes terminal wealth, subject to inventory penalties, by executing roundtrip trades using LOs. We use in-sample-data January to June to calibrate the model to ten equities traded in the Nasdaq exchange, and use out-of-sample data July to December to test the performance of the strategy. We show that introducing option trading strategies research papers volume imbalance measure into the optimisation problem considerably boosts the profits of the strategy.
Profits increase because employing our imbalance measure reduces adverse selection costs and positions LOs in the book to take advantage of favorable price movements.
Executing a basket of co-integrated assets is an important task facing investors. The execution problem is posed as an optimal stochastic control problem and we demonstrate that, under some mild conditions, the value function admits a closed-form solution, and prove a verification theorem. Furthermore, we use data of five stocks traded in the Nasdaq option trading strategies research papers to estimate the model parameters and use simulations to illustrate the performance of the strategy.
Theoretical Applied Finanance, We assume that the drift in the returns of asset prices consists of an idiosyncratic component and a common component given by a co-integration factor. We analyze the optimal investment strategy for an agent who maximizes expected utility of wealth option trading strategies research papers dynamically trading in these assets.
The optimal solution is constructed explicitly in closed-form and is shown to be affine in the co-integration factor. Agents who acknowledge that their models are incorrectly specified are said to be ambiguity averse, and this affects the prices they are willing to trade at. Models for prices of commodities attempt to capture three stylized features: Here we model ambiguity by allowing the agent to consider a class of models absolutely continuous w.
The buyer seller of a forward contract introduces a negative positive drift in the dynamics of the spot price, and enhances downward upward jumps so option trading strategies research papers prices they are willing to trade at are lower higher than that of the forward price under P.
When ambiguity averse buyers and sellers employ the same reference measure they cannot trade because the seller requires more than what the buyer is willing to pay. Finally, we observe that when ambiguity averse option trading strategies research papers price options written on the commodity forward, the effect of ambiguity aversion is strongest when the option is at-the-money, and weaker when it is deep in-the-money or deep out-of-the-money.
Theoretical and Applied Finance, To Appear. Real-option valuation traditionally is concerned with investment under conditions of project-value uncertainty, while assuming that the agent has perfect confidence in a specific model. However, agents generally do not have perfect confidence in their models, and this ambiguity affects their decisions.
Moreover, real investments are not spanned by tradable assets and generate inherently incomplete markets. We derive analytical results for the perpetual option to invest and the linear complementarity problem that the finite time problem satisfies. We find that ambiguity aversion has dual effects that are similar to, but distinct from, those of risk aversion.
In particular, agents are found to exercise options earlier or later than their ambiguity-neutral counterparts, depending on whether the ambiguity stems from uncertainty in the investment or in a hedging asset. We do this under option trading strategies research papers general option trading strategies research papers about the stochastic process option trading strategies research papers by the order-flow of the market. We show how to optimally take positions in the limit order book by placing limit orders at-the-touch when the midprice of the asset is affected by the trading activity of the market.
If net-order flow is positive option trading strategies research papersso short-term-alpha is positive negativethe strategy may even withdraw from the sell buy side of the limit order book to take advantage of inventory appreciation depreciation and to protect the trading strategy from adverse selection costs. We provide two explicit closed-form optimal execution strategies to target VWAP. The strategies that target VWAP are found in closed-form.
One strategy consists of TWAP adjusted upward by a fraction of instantaneous order-flow and adjusted downward by the average order-flow that is expected over the remaining life of the strategy. Option trading strategies research papers other strategy consists of the Almgren-Chriss execution strategy adjusted by the expected volume and net order-flow during the remaining life of the strategy.
We develop an optimal execution policy for an investor seeking to execute a large order using limit and market orders. The investor solves the optimal policy considering different restrictions on volume of both types of orders and depth at which limit orders are posted.
As a particular example we show how the execution policies perform when targeting the volume schedule of the time-weighted-average-price TWAP. The different strategies considered by the investor always outperform TWAP with an average savings per share of about two to three times the spread. Structuring, Trading and Risk Management. Structuring, Trading and Risk Management ].
We present a toy model to understand how to employ the LSMC algorithm and then show how to incorporate realistic constraints in the valuation including: Theoretical and Applied Finance, 19 04 We propose a model where an algorithmic trader takes a view on the distribution of prices at a future date and then decides how to trade in the direction of her predictions using the optimal mix of market and limit orders.
As time goes by, the trader learns from changes in prices and updates her predictions to tweak her strategy. Even though the trader executes a strategy based on a directional view, the sources of profits are both from making the spread as well as capital appreciation of inventories. Rubisov, Applied Mathematical Finance, Forthcoming.
An accelerated share repurchase ASR allows a firm to repurchase a significant portion of its shares immediately, while shifting the burden of reducing the impact and uncertainty in the trade to an intermediary. The intermediary must then purchase the shares option trading strategies research papers the market over option trading strategies research papers days, weeks, or as much as several months. Some contracts allow the intermediary to specify when the repurchase ends, at which point the corporation and the intermediary exchange the difference between the arrival price and the TWAP over the trading period plus a spread.
Hence, the intermediary effectively has an American option embedded within an optimal execution problem. As a result, the firm receives a discounted spread relative to the no early exercise option trading strategies research papers. Moreover, we develop a dimensional reduction of the stochastic control and stopping problem and implement an efficient numerical scheme to option trading strategies research papers the optimal trading and exit strategies.
Because algorithmic traders acknowledge that their models are incorrectly specified we allow for ambiguity in their choices to make their models robust to misspecification. We show how to include misspecification to: In the context option trading strategies research papers market making, we demonstrate that market makers MMs adjust their quotes to reduce inventory risk and adverse selection costs. Our framework adopts a robust optimal control approach and we provide existence and uniqueness results for the robust optimal strategies as well as a verification theorem.
The behavior of the ambiguity averse MM generalizes that of a risk averse MM, and coincide in only one circumstance. A real options model to evaluate the effect of environmental policies on the oil sands rate of expansion with Laleh Kobari and Yuri Lawryshyn, Energy Economics, Volume 45, SeptemberPages Canadian oil sands hold option trading strategies research papers third largest recognized oil deposit in the world.
While the rapidly expanding oil sands industry in western Canada has driven economic growth, the extraction of the oil comes at a significant environmental cost. It is believed that the government policies have failed to keep up with the rapid oil sands expansion, creating serious challenges in managing the environmental option trading strategies research papers. This paper presents a practical, yet financially sound, real options model to evaluate the rate of option trading strategies research papers sands expansion, under different environmental cost scenarios resulting from governmental policies, while accounting for oil price uncertainty and managerial flexibilities.
Our results show that a stricter environmental cost scenario delays investment, but leads to a higher rate of expansion once investment begins. Once constructed, a plant is highly unlikely to shut down. Our model can be used by government policy makers, to gauge the impact of policy strategies on the oil sands expansion rate, and by oil companies, to evaluate expansion strategies based on assumptions regarding market and taxation costs.
Agents often wish to limit the price they pay for an asset. If they are acquiring a large number of shares, they must balance the risk of trading slowly to limit price impact with the risk of future uncertainty in prices. Here, we address the optimal acquisition problem for an agent who is unwilling to pay more than a specified price for an asset while they are subject to market impact and price uncertainty.
The problem is posed as an optimal stochastic control and we provide an analytical closed form solution for option trading strategies research papers perpetual case as well as a dimensional reduced PDE for the general case. The optimal seed of trading is found to no longer be deterministic option trading strategies research papers instead depends on the fundamental price of the asset. Moreover, we demonstrate that a price limiter constraint significantly reduces the conditional tail expectation of the securities costs.
We propose risk measures to assess the performance of High Frequency HF trading strategies that seek to maximize profits from making the realized spread where the holding period is extremely short fractions of a second, seconds or at most minutes.
The HF trader is risk-neutral and maximizes expected terminal wealth but is constrained by both capital and the amount of inventory that she can hold at any time. The risk measures enable the HF trader to fine tune her strategies by trading off different measures of inventory risk, which also proxy for capital risk, against expected profits. The dynamics of the midprice of the asset are driven by information flows which are impounded in the midprice by market participants who update their quotes in the limit order book.
Furthermore, the midprice also exhibits stochastic jumps as a consequence of the arrival of market orders that have an impact on prices which can give rise to market momentum expected prices to trend up or down. Valuing guaranteed withdrawal benefits with stochastic interest rates and volatility with Dmitri Rubisov and Ryan Donnelly, Quantitative Finance, 14 2 pg.
Guaranteed withdrawal benefits GWBs are long term contracts which provide investors with equity participation while guaranteeing them a secured income stream. Due to the long investment horizons involved, stochastic volatility and stochastic interest rates are option trading strategies research papers factors to include in their valuation.
Moreover, investors are typically allowed to participate in a mixed fund composed of both equity and fixed-income securities. Here, we develop an efficient method for valuing these path-dependent products through re-writing the problem in the form of an Asian styled claim and a dimensionally reduced PDE.
Furthermore, we derive an analytical closed form approximation and option trading strategies research papers this approximation with the PDE results and find excellent agreement. We illustrate the various effects of the parameters on the valuation through numerical experiments and discuss their financial implications. Buy Low Sell High: We develop a High Frequency HF trading strategy where the HF trader uses her superior speed to process information and to post limit sell and buy orders.
We introduce a multi-factor self-exciting process which allows for feedback effects in market buy and sell orders and the shape of the limit order book LOB. The model accounts for arrival of market orders that influence activity, trigger one-sided and two-sided clustering of trades, and induce temporary changes in the shape of the LOB.
The resulting strategy outperforms the Poisson strategy where the trader does not distinguish between influential and non-influential events. In this paper we consider a connection between the famous Skorohod embedding problem and the Shiryaev inverse problem for the first hitting time distribution of a Brownian motion: By randomizing the initial state of the process we show that the inverse problem becomes analytically tractable.
The randomization of the initial state allows us to significantly extend the class of target distributions in the case of a linear boundary and moreover allows us to establish connection with the Skorohod embedding problem. Here, we propose two marked point processes to account for these features. The first approach assumes the points are driven by a stochastic hazard rate modulated by a Markov chain while marks are drawn from a regime specific distribution.
In the second approach, the points are driven by a self-exciting process while marks option trading strategies research papers drawn from a fixed distribution. Our approach is based on deriving the valuation PIDE and utilizes transforms to provide semi-analytical closed form solutions. This contrasts with most prior works where the valuation formulae require computing several infinite sums together with numerical integration.
Real options analysis ROA is widely recognized as a superior method for valuing projects with managerial flexibilities.