infonet-economy

Classical option pricing theories are usually built on the law of one price, neglecting the impact of market liquidity that may contribute to significant bid-ask spreads. Within the framework of conic finance, we develop a stochastic liquidity model, extending the discrete-time constant liquidity model of Madan (2010). With this extension, we can replicate the term and skew…

What is the added value of a security which qualifies as a “high-quality liquid asset” (HQLA) under the Basel III “Liquidity Coverage Ratio” (LCR)? In this paper, we quantify the added value in terms of yield changes and, as suggested by Stein (2013), call it “HQLA premium”. To do so, we exploit the introduction of the LCR in Switzerland as a unique quasi-natural experiment and we…

Following the financial crisis of 2007–2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a…

We demonstrate that agent-based simulations can exhibit results in line with classic macroeconomic theory. In particular, we present an agent-based simulation of an Arrow–Debreu economy that accurately exhibits the Stolper–Samuelson effect as an emergent property. Absent of a Walrasian auctioneer or any other central coordination, we let firm and consumer agents of different types…

We develop a simple macroeconomic model with extreme financial frictions (no credit markets) and show that poverty traps can emerge even in the absence of leverage. In our model, farmers produce fruit by renting land from landlords. Crops are exposed to aggregate shocks (weather risk). To guarantee themselves a positive consumption level even after a bad crop, farmers store fruit as…

This paper develops a novel and highly efficient numerical algorithm for the gap risk-adjusted valuation of leveraged certificates. The existing literature relies on Monte Carlo simulations, which are not fast enough to be used in a market making environment. This is because issuers need to compute thousands of price updates per second. By valuing leveraged certificates as multi-…