On the behavior of the price impact in the Kyle-Back model.
José Corcuera*, University of Barcelona
In this paper we study the equilibrium arising in the Kyle-Back model when we allow the depth parameter to be random. This richer model can explain different phenomena observed in the financial market and that remained unexplained. We also unify different extensions of the Kyle-Back model in this framework.
Optimal market dealing under constraints.
Etienne Chevalier*, Université d’Evry; Mhamed Gaigi, ; Vathana Ly Vath, ENSIIE; Mohammed Mnif, ENIT.
We consider a market dealer acting as a liquidity provider by continuously setting bid and ask prices for an illiquid asset in a quote-driven market. The market dealer may benefit from the bid-ask spread but has the obligation to permanently quote both
prices while satisfying some liquidity and inventory constraints. The objective is to maximize the expected utility from terminal liquidation value over a finite horizon and subject to the above constraints. We characterize the value function as the unique
viscosity solution to the associated HJB equation and further enrich our study with numerical results. The contributions of our study concern both the modelling aspects and the dynamic structure of the control strategies. Important features and constraints characterizing market making problems are no longer ignored. Indeed, along with the obligation to continuously quote bid and ask prices, we do not allow the market maker to stop quoting them when the stock inventory reaches its lower or higher bound. Furthermore, we no longer assume the existence of a reference price.
Who knows better in an Emerging Market? Performance of Institutions, Foreigners and Individuals.
Diego Agudelo*, Universidad EAFIT; James Byder, Universidad EAFIT; Paula Yepes, Universidad EAFIT
We find that local investors do better than foreigners in terms of trading execution. However foreign investors obtain better returns than local individuals both in short and long term. Local institutions are the best group on both dimensions. Our result reconcile apparent contradictions in the international finance literature on who invests better in an emerging market. These contradictions disappears with a more careful formulation of the research question at hand. The traditional Locals vs Foreigners or Institutions versus Individuals is too simplistic because it doesn’t distinguish between the different dimensions of performance. Our study makes use of two unique databases of Colombian stocks and acts as out-of-sample test of previous findings. Moreover, we provide evidence that the better performance of Institutions and Foreigners is driven by information advantages.
An empirical analysis of unspanned risk for the U.S. yield curve.
Karoll Gomez*, Universidad Nacional de Colombia.
In this paper, I formally test for the unspanning properties of liquidity premium
risk in the context of a joint Gaussian affine term structure model for zero-coupon
U.S. Treasury and TIPS bonds. In the model, the liquidity factor is considered as
an additional factor that does not span the yield curve, but improves the forecast
of bond risk premia. I present empirical evidence suggesting that indeed liquidity
premium helps to forecast U.S. bond risk premia, but it is not linearly spanned by
the information in the joint yield curve. In addition, I show that the liquidity factor
does not affect the dynamic of bonds under the pricing measure, but does affect
them under the historical measure. Furthermore, the variation in the TIPS liquidity
premium predicts the future evolution of the traditional yield curve factors.