Latency arbitrage and the synchronized placement of orders

We argue that owing to traders’inability to fully express their preferences over the execution times of their orders,contemporary stock market designs are prone to latency arbitrage.In turn,we propose a new order type,which allows traders to specify the time at which their orders are executed after reaching the exchange.Using recent latency data,we demonstrate that the order type proposed here allows traders to synchronize order executions across different exchanges,such that high-frequency traders,even if they operate at the speed of light,can no-longer engage in latency arbitrage.

Empirical Study on Arbitrage Opportunities in China Copper Futures Market

No-arbitrage bound is established with no-arbitrage theory considering all kinds of trade costs, different deposit and loan interest rate, margin and tax in futures markets. The empirical results find that there are many lower bound arbitrage opportunities in China copper futures market from August 8th, 2003 to August 16th, 2005, Concretely, no-arbitrage opportunity is dominant and lower bound arbitrage is narrow in normal market segment. Lower bound arbitrage almost always exists with huge magnitude in inverted market segment. There is basically no-arbitrage in normal market because spot volume is enough, so that upper or lower bound arbi- trage can be realized, There is mostly lower bound arbitrage in inverted market because spot volume is lack.

Stability Analysis of Robust Arbitrage in a Random Interval Valued Financial Market

Stability of robust arbitrage under different probability measures is discussed in a random interval valued financial market.In a fundamental financial market without robust arbitrages, a suitable condition is given to guarantee that the market with new probability measures will also have no robust arbitrage. In order to specify the result got in this article,an example of binomial tree financial model with interval ratios of change is proposed.

NO-ARBITRAGE SYMMETRIES

The no-arbitrage property is widely accepted to be a centerpiece of modern financial mathematics and could be considered to be a financial law applicable to a large class of(idealized) markets.This paper addresses the following basic question:can one characterize the class of transformations that leave the law of no-arbitrage invariant?We provide a geometric formalization of this question in a non probabilistic setting of discrete time-the so-called trajectorial models.The paper then characterizes,in a local sense,the no-arbitrage symmetries and illustrates their meaning with a detailed example.Our context makes the result available to the stochastic setting as a special case.

An Empirical Examination of the Arbitrage Pricing Theory:Evidences from the U.S.Stock Market

This study investigates the effects of changes in local macroeconomic risk factors on returns on the banking,chemicals,insurance,telecommunication,and utilities industries in the U.S.market.Using a multifactor pricing model and data from 1998:01 to 2017:12,empirical results show that the banking,chemical,and telecommunication industries show more differences in their stock reactions to local macroeconomic risk factors.The insurance and telecommunication industries do not react significantly to risk factors.However,all the industries show strong reactions to local market portfolio.

The regulatory arbitrage and window dressing in shadow banking:the example of Chinese wealth management product

We document that in China the maturity dates of bank-issued wealth management products(WMPs)cluster toward the end of a month and then decrease significantly at the beginning of the following month.Our empirical work detects a negative relationship between a bank’s loan-to-deposit ratio(LDR)at month-ends and the number of its issued WMPs expiring within several days of the month-end.Moreover,this WMP clustering and the negative relationship disappear after the reform in which regulators bring up measures for banks with a high deposit deviation degree in 2014.We also document that the banks tend to arrange the high-return WMPs to expire around month-ends to attract customers,and this clustering of high-return WMPs also disappears after the reform.Our findings suggest that banks actively,rather than passively,use WMPs as vehicles for their regulatory arbitrage or window dressing behaviours.

Time-Consistent Asymptotic Exponential Arbitrage with Small Probable Maximum Loss

Based on a concept of asymptotic exponential arbitrage proposed by F?llmerSchachermayer, the author introduces a new formulation of asymptotic arbitrage with two main differences from the previous one: Firstly, the realising strategy does not depend on the maturity time while the previous one does, and secondly, the probable maximum loss is allowed to be small constant instead of a decreasing function of time. The main result gives a sufficient condition on stock prices for the existence of such asymptotic arbitrage.As a consequence, she gives a new proof of a conjecture of F?llmer and Schachermayer.

Robust Valuation,Arbitrage Ambiguity and Profit&Loss Analysis

Model uncertainty is a type of inevitable financial risk.Mistakes on the choice of pricing model may cause great financial losses.In this paper we investigate financial markets with mean-volatility uncertainty.Models for stock market and option market with uncertain prior distributions are established by Peng’s G-stochastic calculus.On the hedging market,the upper price of an(exotic)option is derived following the Black–Scholes–Barenblatt equation.It is interesting that the corresponding Barenblatt equation does not depend on mean uncertainty of the underlying stocks.Appropriate definitions of arbitrage for super-and sub-hedging strategies are presented such that the super-and sub-hedging prices are reasonable.In particular,the condition of arbitrage for sub-hedging strategy fills the gap of the theory of arbitrage under model uncertainty.Finally we show that the term K of finite variance arising in the superhedging strategy is interpreted as the max Profit&Loss(P&L)of shorting a delta-hedged option.The ask-bid spread is in fact an accumulation of the superhedging P&L and the sub-hedging P&L.

Arbitrage-free pricing of derivatives in nonlinear market models

The objective of this paper is to provide a comprehensive study of the no-arbitrage pricing of financial derivatives in the presence of funding costs,the counterparty credit risk and market frictions affecting the trading mechanism,such as collateralization and capital requirements.To achieve our goals,we extend in sev-eral respects the nonlinear pricing approach developed in(El Karoui and Quenez 1997)and(El Karoui et al.1997),which was subsequently continued in(Bielecki and Rutkowski 2015).

Pathwise no-arbitrage in a class of Delta hedging strategies

We consider a strictly pathwise setting for Delta hedging exotic options,based on Follmer’s pathwise It¨o calculus.Price trajectories areˆd-dimensional continuous functions whose pathwise quadratic variations and covariations are determined by a given local volatility matrix.The existence of Delta hedging strategies in this pathwise setting is established via existence results for recursive schemes of parabolic Cauchy problems and via the existence of functional Cauchy problems on path space.Our main results establish the nonexistence of pathwise arbitrage opportunities in classes of strategies containing these Delta hedging strategies and under relatively mild conditions on the local volatility matrix.

Statistical arbitrage under the efficient market hypothesis

When a financial derivative can be traded consecutively and its terminal payoffs can be adjusted into a stationary time series,there might be a statistical arbitrage opportunity even under the efficient market hypothesis.In particular,we show the examples of selling put options of the three major ETFs(Exchange Traded Funds)in the U.S.market.

Forecasting semi-stationary processes and statistical arbitrage

If a financial derivative can be traded consecutively and its terminal payoffs can be adjusted as the sum of a bounded process and a stationary process,then we can use the moving average of the historical payoffs to forecast and the corresponding errors form a generalised mean reversion process.Thus we can price the financial derivatives by its moving average.One can even possibly get statistical arbitrage from certain derivative pricing.Weparticularly discuss the example of European call options.We show that there is a possibility to get statistical arbitrage from Black-Scholes’s option price.

Massive energy storage system for effective usage of renewable energy

The current energy trend indicates a strong thrust toward transforming renewable energy as a major power source.To achieve this mission,battery energy storage systems(BESSs)are indispensable.Although BESSs are expensive,cost reduction can be achieved by using BESSs for multiple purposes,such as load leveling,business continuity planning,frequency control,capacity market,arbitrage,and emergency power.In this paper,various applications of BESSs are classified.The possibility of achieving conflict-free combination of different applications is demonstrated.The total required energy storage capacity in Japan is estimated to be 150–200 GWh by 2030.The present status of NaS batteries for multipurpose use and new trends in battery-based businesses are introduced.

A New Mean Reversion Model of Close-End Fund

On the basis of fractal theory, one of the nonlinear theories, this paper studies the validity of Chinese fund market fractal time sequence through Hurst exponent, calculates the H value and proposes a new close-end fund mean reversion model. Meanwhile, this paper validates the mean reversion time sequence for consecutive 54 week data of fund market. The result indicates that this model can effectively prove that Chinese close-end fund market follows the biased random walk. The research also proves that the fund discount does have mean reversion tendency and averagely the fund with high discount has a higher excess yield than that of the fund with low discount. The mean excess yield and the ratio between discount rate deviation and standard deviation demonstrate a descending relationship. The optimum investment period based on ＂mean reversion＂ is one month. Consequently this model provides a new arbitrage method through the discount of close-end fund.

Are Securities Also Derivatives?

This paper has used the Arbitrage Theorem (Gordan Theorem) to show that first, all securities are derivatives for each other, and they are priced by the same risk neutral probability measure. Second, after the firm changes its debt-equity ratio, the equityholders can always combine the new equity with other existing securities to create a home-made equity which will give exactly the same time-1 payoff of the old equity. That is, we have a capital structure irrelevancy proposition: changes in firms’ debt-equity ratios will not affect equityholders’ wealth (welfare), and equityholders’ preferences toward variance are irrelevant. Third, when the firm moves from a more certain project to a more uncertain one, the time-0 price of equity will increase, but (because the time-1 payoff of common bond has an upper bound) the time-0 price of common bond will decrease. Fourth, different labor contractual arrangements will not affect the time-0 price of labor input. When the firm moves from a more certain project to a more uncertain one, the time-0 price of labor input will increase if it is under the share or the mixed contract.

EXISTENCE OF STOCHASTIC EQUILIBRIUM WITH INCOMPLETE FINANCIAL MARKETS

This paper analyzes the aritrage free security markets and the general equilibrium existence problem for a stochastic economy with incomplete financial markets. Information structure is given by an event tree. This paper restricts attention to purely financial securities. It is assume that trading takes place in the sequence of spot markets and futures markets for securities payable in units of account. Unlimited short selling in securities is allowed. Financial markets may be incomplete: some consumption streams may be impossible to obtain by any trading strategy. Securities may be individually precluded from trade at arbitrary states and dates. The security price process is arbitrage free the dividend process if and only if there exists a stochstic state price (present value) process: the present value of the security prices at every vertex is the present value of their dividend and capital values over the set of immediate successors; the current value of each security at every vertex is the present value of its future dividend stream over all succeeding vertices. The existence of such an equilibrium is proved under the following condition: continuous, weakly convex, strictly monotone and complete preferences, strictly positive endowments and dividends processes.

Structural Stability of the Financial Market Model: Continuity of Superhedging Price and Model Approximation

The present paper continues the topic of our recent paper in the same journal,aiming to show the role of structural stability in financial modeling.In the context of financial market modeling,structural stability means that a specific“no-arbitrage”property is unaffected by small(with respect to the Pompeiu–Hausdorff metric)perturbations of the model’s dynamics.We formulate,based on our economic interpretation,a new requirement concerning“no arbitrage”properties,which we call the“uncertainty principle”.This principle in the case of no-trading constraints is equivalent to structural stability.We demonstrate that structural stability is essential for a correct model approximation(which is used in our numerical method for superhedging price computation).We also show that structural stability is important for the continuity of superhedging prices and discuss the sufficient conditions for this continuity.

Battery Storage Configuration of AC/DC Hybrid Distribution Networks

The upscaling requirements of energy transition highlight the urgent need for ramping up renewables and boosting system efficiencies.However,the stochastic nature of excessive renewable energy resources has challenged stable and efficient operation of the power system.Battery energy storage systems(BESSs)have been identified as critical to mitigate random fluctuations,unnecessary green energy curtailment and load shedding with rapid response and flexible connection.On the other hand,an AC/DC hybrid distribution system can offer merged benefits in both AC and DC subsystems without additional losses during AC/DC power conversion.Therefore,configuring BESSs on an AC/DC distribution system is wellpositioned to meet challenges brought by carbon reductions in an efficient way.A bi-level optimization model of BESS capacity allocation for AC/DC hybrid distribution systems,considering the flexibility of voltage source converters(VSCs)and power conversion systems(PCSs),has been established in this paper to address the techno-economic issues that hindered wide implementation.The large-scale nonlinear programming problem has been solved utilizing a genetic algorithm combined with second-order cone programming.Rationality and effectiveness of the model have been verified by setting different scenarios through case studies.Simulation results have demonstrated the coordinated operation of BESS and AC/DC hybrid systems can effectively suppress voltage fluctuations and improve the cost-benefit of BESSs from a life cycle angle.

Extensions of Farkas-Minkowski's Lemma and Stiemke's Lemma in the Space l^1

This paper extends Farkas Minkowski’s Lemma and Stiemke’s Lemma from the Euclidean space to (l 1,l ∞). The extensions of Farkas Minkowski’s Lemma and Stiemke’s Lemma are the Basic Valuation Theorem in the case (l 1,l ∞). The security price is weakly arbitrage free if and only if there exists a positive state vector; the security price is strictly arbitrage free if and only if there exists a strictly positive state vector. The present value of the securities prices at date 0 is the value of their returns over all countably infinite possible states of nature at date 1.

Multi-objective Optimization of Production Scheduling Using Particle Swarm Optimization Algorithm for Hybrid Renewable Power Plants with Battery Energy Storage System

Considering the increasing integration of renewable energies into the power grid,batteries are expected to play a key role in the challenge of compensating the stochastic and intermittent nature of these energy sources.Besides,the deployment of batteries can increase the benefits of a renewable power plant.One way to increase the profits with batteries studied in this paper is performing energy arbitrage.This strategy is based on storing energy at low electricity price moments and selling it when electricity price is high.In this paper,a hybrid renewable energy system consisting of wind and solar power with batteries is studied,and an optimization process is conducted in order to maximize the benefits regarding the dayahead production scheduling of the plant.A multi-objective cost function is proposed,which,on the one hand,maximizes the obtained profit,and,on the other hand,reduces the loss of value of the battery.A particle swarm optimization algorithm is developed and fitted in order to solve this non-linear multi-objective function.With the aim of analyzing the importance of considering both the energy efficiency of the battery and its loss of value,two more simplified cost functions are proposed.Results show the importance of including the energy efficiency in the cost function to optimize.Besides,it is proven that the battery lifetime increases substantially by using the multi-objective cost function,whereas the profitability is similar to the one obtained in case the loss of value is not considered.Finally,due to the small difference in price among hours in the analyzed Iberian electricity market,it is observed that low profits can be provided to the plant by using batteries just for arbitrage purposes in the day-ahead market.