scholarly journals Agent-based risk management – a regulatory approach to financial markets

2015 ◽  
Vol 42 (5) ◽  
pp. 780-820 ◽  
Author(s):  
Thomas Theobald
Keyword(s):  
Financial Markets ◽  
Behavioral Model ◽  
Capital Requirements ◽  
Regulatory Framework ◽  
Market Model ◽  
Content Type ◽  
Agent Based ◽  
No Arbitrage ◽  
Market Participants ◽  
Regulatory Approach

Purpose – The purpose of this paper is to provide market risk calculation for an equity-based trading portfolio. Instead of relying on the purely stochastic internal model method which banks currently apply in line with the Basel regulatory requirements, the author also propose including alternative price mechanisms from the financial literature in the regulatory framework. Design/methodology/approach – For this purpose, a financial market model with heterogeneous agents is developed, capturing the realistic feature that parts of the investors do not follow the assumption of no arbitrage, but are motivated by behavioral heuristics instead. Findings – Although both the standard stochastic and the behavioral model are restricted to a calibration including the last 250 trading days, the latter is able to capitalize possible turbulence on financial markets and likewise the well-known phenomenon of excess volatility – even if the last 250 days reflect a non-turbulent market. Practical implications – Thus, including agent-based models in the regulatory framework could create better capital requirements with respect to their level and counter-cyclicality. Originality/value – This in turn could reduce the extent to which bubbles arise, since market participants would have to anticipate comprehensively the costs of such bubbles bursting. Furthermore, a key ratio is deduced from the agent-based construction to lower the influence of speculative derivatives.

scholarly journals Behavioral agent-based framework for interacting financial markets

2020 ◽  
Vol 5 (2) ◽  
pp. 94-115
Author(s):  
Heba M. Ezzat
Keyword(s):  
Financial Markets ◽  
Trading Strategy ◽  
Past Performance ◽  
Time Step ◽  
Monetary Policies ◽  
Content Type ◽  
Agent Based ◽  
Market Makers ◽  
Novel Approach ◽  
Excess Volatility

Purpose This paper aims at developing a behavioral agent-based model for interacting financial markets. Additionally, the effect of imposing Tobin taxes on market dynamics is explored. Design/methodology/approach The agent-based approach is followed to capture the highly complex, dynamic nature of financial markets. The model represents the interaction between two different financial markets located in two countries. The artificial markets are populated with heterogeneous, boundedly rational agents. There are two types of agents populating the markets; market makers and traders. Each time step, traders decide on which market to participate in and which trading strategy to follow. Traders can follow technical trading strategy, fundamental trading strategy or abstain from trading. The time-varying weight of each trading strategy depends on the current and past performance of this strategy. However, technical traders are loss-averse, where losses are perceived twice the equivalent gains. Market makers settle asset prices according to the net submitted orders. Findings The proposed framework can replicate important stylized facts observed empirically such as bubbles and crashes, excess volatility, clustered volatility, power-law tails, persistent autocorrelation in absolute returns and fractal structure. Practical implications Artificial models linking micro to macro behavior facilitate exploring the effect of different fiscal and monetary policies. The results of imposing Tobin taxes indicate that a small levy may raise government revenues without causing market distortion or instability. Originality/value This paper proposes a novel approach to explore the effect of loss aversion on the decision-making process in interacting financial markets framework.

Disposition effect and multi-asset market dynamics

2019 ◽  
Vol 11 (2) ◽  
pp. 144-164
Author(s):  
Heba M. Ezzat
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Switching Behavior ◽  
Asset Markets ◽  
Disposition Effect ◽  
Stylized Facts ◽  
Content Type ◽  
Agent Based ◽  
Multiple Assets ◽  
Pricing Dynamics

Purpose Asset pricing dynamics in a multi-asset framework when investors’ trading exhibits the disposition effect is studied. The purpose of this paper is to explore asset pricing dynamics and the switching behavior among multiple assets. Design/methodology/approach The dynamics of complex financial markets can be best explored by following agent-based modeling approach. The artificial financial market is populated with traders following two heterogeneous trading strategies: the technical and the fundamental trading rules. By simulation, the switching behavior among multiple assets is investigated. Findings The proposed framework can explain important stylized facts in financial time series, such as random walk price dynamics, bubbles and crashes, fat-tailed return distributions, absence of autocorrelation in raw returns, persistent long memory of volatility, excess volatility, volatility clustering and power-law tails. In addition, asset returns possess fractal structure and self-similarity features; though the switching behavior is only allowed among the asset markets. Practical implications The model demonstrates stylized facts of most real financial markets. Thereafter, the proposed model can serve as a testbed for policy makers, scholars and investors. Originality/value To the best of knowledge, no research has been conducted to introduce the disposition effect to a multi-asset agent-based model.

UK financial markets review is prelude to global push

2015 ◽  
Keyword(s):  
Financial Markets ◽  
Fixed Income ◽  
Senior Managers ◽  
Content Type ◽  
Voluntary Standards ◽  
Market Participants ◽  
Forward Looking

Significance The year-long official review was intended to restore trust in the wholesale fixed income, currency and commodities (FICC) markets. The FEMR embraces a more forward-looking approach to identifying and mitigating risks, as UK regulators recognise that laws, standards and norms covering FICC markets lag behind market innovation. UK regulators are seeking to internationalise their approach through global regulatory efforts. Impacts The coverage of the new Senior Managers' Regime would nearly double, to over 130,000 individuals. Firms would be encouraged to strengthen whistleblower procedures to uncover misconduct. If FICC market participants fail to agree and follow sufficiently stringent voluntary standards, tougher regulation may result. UK regulators' internationalisation efforts may founder on their US counterparts' lack of appetite for further ambitious regulatory moves. Rather than tougher regulation, the Republican-controlled Congress is mulling regulatory rollback.

Transaction tax, heterogeneous traders and market volatility

Kybernetes ◽  
2015 ◽  
Vol 44 (5) ◽  
pp. 757-770
Author(s):  
Hongquan LI ◽  
Gang Cheng ◽  
Shouyang Wang
Keyword(s):  
Agent Based Modeling ◽  
Market Volatility ◽  
Market Model ◽  
Comprehensive Understanding ◽  
Adaptive Agents ◽  
Content Type ◽  
Agent Based ◽  
Securities Transaction Tax ◽  
Market Stabilization ◽  
Transaction Tax

Purpose – The securities transaction tax (STT) has been theoretically considered as an important regulation device for decades. However, its role and effectiveness in financial markets is still not well understood both theoretically and empirically. By use of agent-based modeling method, the purpose of this paper is to present a new artificial stock market model with self-adaptive agents, which allows the assessment of the impacts from various levels of STTs in distinctive market environments and thus a comprehensive understanding of the effects of STTs is achieved. Design/methodology/approach – In the model, agents are allowed to employ the strategies used by the following five types of investors: contrarians, random traders, momentum traders, fundamentalists and exit strategy holders. Specifically, the authors start with the investigation of the dynamics of a tax free benchmark market; then the patterns of market behaviors and the behaviors of various types of investors are discussed with different levels of STTs in markets with mild and high fluctuations. Findings – The simulation results consistently show that a moderate transaction tax does contribute to market stabilization in terms of reducing market volatility while with a price of mild decrease of market efficiency and liquidity. The findings suggest that a balance between market stability and efficiency could be reached if regulatory authorities introduce STTs to markets discreetly. Originality/value – This paper enriches the comprehensive understanding of the effects of STT, and gives good explanation about the controversy between Tobin’s proponents and anti-Tobin group.

scholarly journals Blockchain Technology and Electricity Wholesale Markets: Expert Insights on Potentials and Challenges for OTC Trading in Europe

Energies ◽  
2019 ◽  
Vol 12 (5) ◽  
pp. 832 ◽  
Author(s):  
Carol Dick ◽  
Aaron Praktiknjo
Keyword(s):  
Personal Data ◽  
Regulatory Framework ◽  
Use Case ◽  
Over The Counter ◽  
Personal Data Protection ◽  
Market Participants ◽  
Blockchain Technology ◽  
Regulatory Approach ◽  
Data Layers ◽  
The Eu

In this manuscript, we investigate the adoption of blockchain for over-the-counter (OTC) electricity wholesale trading under the EU regulatory framework. Our analysis of the core legislation reveals six potential issues: (1) data immutability-related error correction, (2) personal data protection and immutability, (3) access to different data layers, (4) obligation and capacity to report, (5) identification of counterparties and (6) conflict of interest. These six issues were used as basis for a survey with experts in this field from industry and academia. The majority of our respondents indicated four major points: (i) reduction of transaction costs is the main expected benefit, (ii) the application of blockchain can be compliant with the current regulatory framework, (iii) a sandbox is the most welcome regulatory approach to reduce legal uncertainty, and (iv) the first use case to be commercially implemented is expected to be a P2P platform, ahead of a use case focused on post-trade processes. We believe that the results presented in this manuscript might serve as guidance for market participants aiming to enable the development of blockchain.

scholarly journals The arbitrage In Securities Market Model And Some There Properties

2021 ◽  
Vol 26 (4) ◽  
pp. 542-549
Author(s):  
Adel Murtda Al-awci ◽  
Noori F. Al-Mayahi
Keyword(s):  
Financial Markets ◽  
Linear Topological Space ◽  
Securities Market ◽  
Market Model ◽  
Separation Theorems ◽  
Topological Spaces ◽  
No Arbitrage ◽  
Mathematical Formulas ◽  
Economic Balance ◽  
Necessary And Sufficient

The  applications of functional analysis in economics began worked out since the  by presenting theoretical studies related to the development and balance of financial  markets by building mathematical models with linear topological space , describing and defining the economic balance of the stock market in mathematical formulas and terms , and then using the theorems of  linear topological spaces such as Han's theorems . Banach , separation theorems  , open function theorem ,closed statement theorem and so on to create the necessary and sufficient condition to make the market model achieve viability , achieve no arbitrage , and not recognize No free Lunches                                                                                                                             

Determinants of banks’ provisioning policies during the crisis

2014 ◽  
Vol 40 (10) ◽  
pp. 987-1006 ◽  
Author(s):  
Domenico Curcio ◽  
Douglas Dyer ◽  
Angela Gallo ◽  
Igor Gianfrancesco
Keyword(s):  
Financial Markets ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Balance Sheet ◽  
Capital Requirements ◽  
Income Smoothing ◽  
Capital Management ◽  
Loan Loss ◽  
Content Type ◽  
Chinese Banking

Purpose – The purpose of this paper is to investigate the discretionary use of loan loss provisions in the Chinese banking sector during the global financial crisis. The objective of this paper is twofold: to add new evidence to the scant literature dealing with a peculiar banking sector, such as the Chinese one, and to shed more light on banks’ provisioning behaviour during stressed financial markets conditions. Design/methodology/approach – Using bank-level balance sheet and financial statements data, the authors test for income smoothing and capital management hypotheses, and detect differences in provisioning decisions of listed banks and unlisted financial intermediaries during turbulent financial markets conditions. Findings – The authors find support for the income smoothing hypothesis, but not for the capital management one. Chinese listed banks appear to be less risky and less involved in income smoothing to shift their risk, when compared to unlisted credit institutions. Social implications – The results obtained from this paper help to understand the functioning of bank provisioning regime in the Chinese banking system and how provisioning mechanisms can address the issues associated with the pro-cyclicality of bank capital requirements. Originality/value – Though referred to a particular banking sector, such as the Chinese one, the results of this paper can provide a tremendous incentive to those national and international authorities that are bound to promote forward-looking provisioning practices. These practices would allow banks to build a buffer of reserves to face the downward pressure on earnings and capital associated with periods of worsening credit quality.

scholarly journals The impact of the SARS-CoV-2 pandemic on financial markets: a seismologic approach

2021 ◽  
Author(s):  
Alessandro Spelta ◽  
Nicolò Pecora ◽  
Andrea Flori ◽  
Paolo Giudici
Keyword(s):  
Financial Markets ◽  
Efficient Market Hypothesis ◽  
The United States ◽  
Market Model ◽  
Investment Strategies ◽  
Market Participants ◽  
Empirical Regularities ◽  
Empirical Regularity ◽  
Speculative Behavior ◽  
The Impact

AbstractThis work investigates financial volatility cascades generated by SARS-CoV-2 related news using concepts developed in the field of seismology. We analyze the impact of socio-economic and political announcements, as well as of financial stimulus disclosures, on the reference stock markets of the United States, United Kingdom, Spain, France, Germany and Italy. We quantify market efficiency in processing SARS-CoV-2 related news by means of the observed Omori power-law exponents and we relate these empirical regularities to investors’ behavior through the lens of a stylized Agent-Based financial market model. The analysis reveals that financial markets may underreact to the announcements by taking a finite time to re-adjust prices, thus moving against the efficient market hypothesis. We observe that this empirical regularity can be related to the speculative behavior of market participants, whose willingness to switch toward better performing investment strategies, as well as their degree of reactivity to price trend or mispricing, can induce long-lasting volatility cascades.

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