Optimal trading: The importance of being adaptive

2021 ◽  
pp. 2050022
Author(s):  
Claudio Bellani ◽  
Damiano Brigo ◽  
Alex Done ◽  
Eyal Neuman
Keyword(s):  
Finite Number ◽  
Transaction Costs ◽  
Adaptive Strategies ◽  
Market Impact ◽  
Short Term ◽  
Optimal Trading ◽  
Static Strategy ◽  
Optimal Trade Execution

We compare optimal static and dynamic solutions in trade execution. An optimal trade execution problem is considered where a trader is looking at a short-term price predictive signal while trading. When the trader creates an instantaneous market impact, it is shown that transaction costs of optimal adaptive strategies are substantially lower than the corresponding costs of the optimal static strategy. In the same spirit, in the case of transient impact, it is shown that strategies that observe the signal a finite number of times can dramatically reduce the transaction costs and improve the performance of the optimal static strategy.

scholarly journals Debt Maturity and the Dynamics of Leverage

2021 ◽  
Author(s):  
Thomas Dangl ◽  
Josef Zechner
Keyword(s):  
Transaction Costs ◽  
Financial Distress ◽  
Cash Flows ◽  
Debt Maturity ◽  
Corporate Debt ◽  
Short Term ◽  
Trade Off ◽  
Maturity Structure

Abstract This paper shows that short debt maturities commit equityholders to leverage reductions when refinancing expiring debt in low-profitability states. However, shorter maturities lead to higher transaction costs since larger amounts of expiring debt need to be refinanced. We show that this trade-off between higher expected transaction costs against the commitment to reduce leverage in low-profitability states motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress and risky cash flows benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt. Evidence supports the model’s predictions.

Economic Complexity and Trade Diversification in the Western Hemisphere Between 1962 and 2017

2021 ◽  
pp. 115-147
Author(s):  
Jorge Mauricio Falcón Gómez ◽  
Fernando Martín Mayoral
Keyword(s):  
Financial Markets ◽  
Transaction Costs ◽  
Trade Openness ◽  
Terms Of Trade ◽  
Western Hemisphere ◽  
Short Term ◽  
Economic Complexity ◽  
Comparative Advantages ◽  
Negative Effect

Trade diversification patterns help explain the level of utilization of trade opportunities by countries, mainly the least developed. Empirical analyses show an inverse U relationship between trade diversification and level of development. Trade diversification measures used do not take into account differences in complexity of exports, and complexity indices only consider products with comparative advantages. This study seeks to cover both gaps by analyzing the differences in the determinants of trade diversification, considering the complexity of products exported by 19 Western Hemisphere countries from 1962 to 2017. The results show that after controlling for economic complexity, the inverted U relationship disappears. Development of financial markets positively affects the complexity of trade diversification in the long term, while the terms of trade that have a negative effect on trade diversification does not affect the complexity-corrected indices. In the short term, transaction costs and trade openness appear to have a significant effect.

OPTION PRICING FOR INCOMPLETE MARKETS VIA STOCHASTIC OPTIMIZATION: TRANSACTION COSTS, ADAPTIVE CONTROL AND FORECAST

2001 ◽  
Vol 04 (01) ◽  
pp. 179-195 ◽  
Author(s):  
SERGEI FEDOTOV ◽  
SERGEI MIKHAILOV
Keyword(s):  
Option Pricing ◽  
Stochastic Optimization ◽  
Transaction Costs ◽  
Incomplete Markets ◽  
Option Price ◽  
Optimal Feedback Control ◽  
Analytic Method ◽  
Total Risk ◽  
Adaptive Process ◽  
Optimal Trading

The problem of determining the European-style option price in incomplete markets is examined within the framework of stochastic optimization. An analytic method based on the stochastic optimization is developed that gives the general formalism for determining the option price and the optimal trading strategy (optimal feedback control) that reduces the total risk inherent in writing the option. The cases involving transaction costs, the stochastic volatility with uncertainty, stochastic adaptive process, and forecasting process are considered. A software package for the option pricing for incomplete markets is developed and the results of numerical simulations are presented.

Option Based Portfolio Insurance Revisited

2007 ◽  
Vol 2 (2) ◽  
pp. 195-215
Author(s):  
R. Bouchaib
Keyword(s):  
Transaction Costs ◽  
Asset Allocation ◽  
Investment Strategy ◽  
Theoretical Framework ◽  
Market Impact ◽  
Dynamic Allocation ◽  
Portfolio Insurance ◽  
Dynamic Investment ◽  
Constant Proportion Portfolio Insurance

ABSTRACTIn recent years, Constant Proportion Portfolio Insurance (CPPI) has been the most widely recognised form of portfolio insurance among market practitioners, despite a lack of theoretical framework to support it. This paper presents a revised formulation of Option Based Portfolio Insurance (OBPI) and shows, through a case study, how it can be used as a structured product and applied in practice as a dynamic investment strategy for insurance and pensions funds such as with-profits funds. CPPI and the Revised Option Based Portfolio Insurance (ROBPI) technique adopted in this paper are similar in the sense that they rely on dynamic allocation between risky and risk-free assets to provide downside protection. Comparison between the two methods shows that ROPBI is more efficient and forward looking, giving more information about downside risk and producing less volatile asset allocation, which reduces transaction costs and any market impact.

scholarly journals To Examine Coping Adaptive Strategies Used by Households and Make Policy Recommendations for Addressing Future Climate Change Impacts on Livelihoods in Kapsokwony Division, Mt. Elgon Sub-County, Bungoma County, Kenya

2018 ◽  
Vol 1 (4) ◽  
pp. 251-269
Author(s):  
Sindani Bon Bonzemo
Keyword(s):  
Climate Change ◽  
Economic Development ◽  
Climate Variability ◽  
Social Economic ◽  
Adaptive Strategies ◽  
Policy Recommendations ◽  
Short Term ◽  
Climate Resilience ◽  
The World ◽  
Social Economic Development

Long and short term changes in climate are disproportionately affecting all parts of the world in equal measure. The most impacted by vagaries of climate change are the most vulnerable and the poor who live in the developing world. Climate change and climate variability impacts the smallholder farmers though they continue to apply traditional technologies in order to cope with climate change vulnerability. In most of the parts the world over, coping strategies are lacking especially in the African States. Trans-disciplinary research approach was used to analyze the perception of community’s’ responses to climate change and climate variability at the household level. The purpose of this study was to build new transformation knowledge by integrating the traditional and the modern adaptive technologies in order to transform lives of the indigenous communities in the study area. This paper therefore explores and highlights the existing and modern technologies which can be employed by farmers to counteract the impacts of climate change and climate variability. Primary data was collected through in-depth and informant interviews together with Focused Group Discussions (FGDs) and a structured questionnaire administered to 384 household heads in twelve sub-locations in the study area (Kapsokwony Division) formed the basis of these policy recommendations. Secondary data constituting rainfall and temperature parameters was collected from Kenya Meteorological Department (KMD). The long and short term integrated adaptive strategies and policy recommendations generated and developed by all the actors including those from the academia and the traditional communities during the research are meant to build climate resilience and adaptive capacity at local and national levels. A framework that has been developed by this research will help support policy decisions in conservation agriculture and livestock rearing systems, water resource management, change in social behavior, accessing early warning information, promotion of organic farming and human health systems. If fully implemented these policy recommendations will go a long way to bring a paradigm shift that will improve livelihoods and social economic development in the region. These recommendations can be replicated in any other region of the world to bring about desired changes to a people impacted by climate change. The research study achieved capacity building, resilience, adaptive learning, change in attitude and behavior, community empowerment, application of transformation knowledge as well as climate change awareness amongst area residents. The new societal knowledge was used to elucidate long term policies and adaptive strategies to enhance climate resilience, help eliminate poverty levels, improve livelihoods and sustain social economic development. The study recommends collaboration among stakeholders and integration of various sources of knowledge in addressing climate change and climate variability among residents in Kapsokwony Sub-county. Further research should be carried out in the future to corroborate these findings.

scholarly journals Technical trading revisited: evidence from the Asian stock markets

2014 ◽  
Vol 11 (2) ◽  
pp. 511-532 ◽  
Author(s):  
Thorben Lubnau ◽  
Neda Todorova
Keyword(s):  
Transaction Costs ◽  
Moving Average ◽  
Predictive Ability ◽  
Excess Returns ◽  
Short Term ◽  
Technical Trading ◽  
Developed Markets ◽  
Stock Indices ◽  
Bootstrap Tests

We examine the forecasting power and profitability of moving average (MA) and trading range break (TRB) rules for the daily prices of ten Asian stock indices from January 1990 to September 2012 using bootstrap tests. The results confirm the predictive ability of MA rules whereas the picture uncovered by the TRB rules is more mixed. The MA rules consistently generate positive excess returns after transaction costs, with highest magnitudes often achieved for less developed markets. However, more developed markets surprisingly seem to be far from informationally efficient as well. Furthermore, short-term variants of the trading rules outperform systematically long-term variants.

How do Spanish unlisted family firms rebalance their capital structures?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zélia Serrasqueiro ◽  
Fernanda Matias ◽  
Julio Diéguez-Soto
Keyword(s):  
Capital Structure ◽  
Transaction Costs ◽  
Family Firms ◽  
Adjustment Costs ◽  
Dynamic Panel Data ◽  
Future Research ◽  
Short Term ◽  
Content Type ◽  
Speed Of Adjustment

PurposeThis paper seeks to analyze the family firm's capital structure decisions, focusing on the speed of adjustment (SOA) as well as on the effect of distance from the target capital structure on the SOA towards target short-term and long-term debt ratios in unlisted small and medium-sized family firms.Design/methodology/approachMethodologically, we use dynamic panel data estimators to estimate the effects of distance on the speeds of adjustment towards those targets. Data for the period 2006–2014 were collected for two research sub-samples: one sub-sample with 398 family firms; the other sub-sample contains 217 non-family firms.FindingsThe results show that the deviation from the target debt ratios impacts negatively on the speeds of adjustment towards target short-term and long-term debt ratios in unlisted family firms. These results suggest that family firms, deviating from target debt ratios, face deviation costs, i.e. insolvency costs, inferior to the adjustment costs, i.e. transaction costs. Therefore, family firms stay away from the target debt ratios for a long time than do non-family firms.Research limitations/implicationsThe research sample comprises a low number of family firms, therefore for future research we suggest increasing the size of the sample of family firms to get a deeper understanding of family firms' SOA towards capital structure. Additionally, we suggest the analysis of other potential determinants of the speed of adjustment towards target capital structure.Practical implicationsThe results obtained suggest that the distance from the target short-term and long-term debt ratios can be avoided if these firms do not depend almost exclusively on internal finance to adjust towards target capital structure. Moreover, for policymakers, we suggest the creation/promotion of alternative external finance sources, allowing reduced transaction costs that contribute to a faster adjustment of small family firms towards target capital structure.Originality/valueThe most previous research focusing on capital structure decisions have focused on listed family firms. To fill this gap, this study examines the speed of adjustment towards target debt ratios in the context of unlisted family firms. Moreover, transaction costs are a function of debt maturity, therefore this study examines separately the speeds of adjustment towards target short-term and long-term debt ratios. This paper shows that the adjustment costs (i.e. transaction costs) could hold back family firms from rebalancing its capital structure.

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