Quantitative Finance: Price Impact Models and the Behavior of Market Participants
Speaker(s)- Rene Carmona (Operations Research and Financial Engineering, Princeton University)
Description
The recent financial crisis has highlighted the limitations of some financial models, with regard to their inadequacy in industrial implementation. In particular, it has brought to the forefront the crucial problem of trade execution in the face of illiquidity constraints.
In these workshop lectures, by modeling how the prices of financial transactions are "impacted" by the size and frequency of the transactions, we investigate three questions of how market participants may organize their behavior optimally. For the first two applications, we use the Almgren-Chriss model for permanent and temporary price impacts, a model which is widely used in the industry because of its simplicity. We first consider the problem of the optimal liquidation of a position over a fixed time frame. Second, motivated by problems faced by fund managers facing fiduciary constraints or tracking indexes, we consider a form of the "predatory trading game" in which a distressed trader has to liquidate a position in a short period of time, trading with "predators" who do not face the same trading constraints. The third application concerns equilibrium models for the behavior of market makers and the construction of order books.
In each case, we will devote most of the time to describing the models and formalizing the corresponding stochastic optimization problems. Mathematical proofs will be discussed insofar as they shed light on the limitations of the current results and implementations, and possible extensions.
Schedule
| Thur, June 21 - Location: STEW 310 | ||
| Time | Speaker | Title |
| 8:30-9:55AM | Rene Carmona | |
| 10:00-10:30AM | Break | |
| 10:30-11:55AM | Rene Carmona | |