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Journal articles

Bird, R., Gao, X. & Yeung, D. 2017, 'Time-series and cross-sectional momentum strategies under alternative implementation strategies', Australian Journal of Management, vol. 42, no. 2, pp. 230-251.
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Borovkov, K., Mishura, Y., Novikov, A. & Zhitlukhin, M. 2017, 'Bounds for expected maxima of Gaussian processes and their discrete approximations', Stochastics, vol. 89, no. 1, pp. 21-37.
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© 2015 Taylor & Francis The paper deals with the expected maxima of continuous Gaussian processes (Formula presented.) that are Hölder continuous in (Formula presented.)-norm and/or satisfy the opposite inequality for the (Formula presented.)-norms of their increments. Examples of such processes include the fractional Brownian motion and some of its “relatives” (of which several examples are given in the paper). We establish upper and lower bounds for (Formula presented.) and investigate the rate of convergence to that quantity of its discrete approximation (Formula presented.). Some further properties of these two maxima are established in the special case of the fractional Brownian motion.

Casavecchia, L. & Suh, J.Y. 2017, 'Managerial incentives for risk-taking and internal capital allocation', Australian Journal of Management.
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Chen, Z., Gallagher, D.R. & Lee, A.D. 2017, 'Testing the effect of portfolio holdings disclosure in an environment absent of mandatory disclosure', Accounting and Finance, vol. 57, no. 1, pp. 113-129.
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© 2016 AFAANZ.This study examines a number of portfolio disclosure regimes with respect to accuracy and susceptibility to copycat behaviour in an environment absent of mandatory disclosure. We find that periodic portfolio disclosure tends to underestimate true excess performance as well as idiosyncratic risk in top-quartile fund managers, with longer inter-reporting intervals tending to result in greater differences. 'Copycat funds' following the disclosed holdings of top-tier managers significantly underperform the underlying fund, while copycats following bottom-tier managers significantly outperform the underlying fund. Our findings suggest that periodic reporting at monthly intervals or longer would not affect fund alpha generation.

Chiarella, C., He, X.Z., Shi, L. & Wei, L. 2017, 'A behavioural model of investor sentiment in limit order markets', Quantitative Finance, vol. 17, no. 1, pp. 71-86.
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© 2016 Informa UK Limited, trading as Taylor & Francis GroupBy incorporating behavioural sentiment in a model of a limit order market, we show that behavioural sentiment not only helps to replicate most of the stylized facts in limit order markets simultaneously, but it also plays a unique role in explaining those stylized facts that cannot be explained by noise trading, such as fat tails in the return distribution, long memory in the trading volume, an increasing and non-linear relationship between trade imbalance and mid-price returns, as well as the diagonal effect, or event clustering, in order submission types. The results show that behavioural sentiment is an important driving force behind many of the well-documented stylized facts in limit order markets.

Claussen, A., Löhr, S., Rösch, D. & Scheule, H. 2017, 'Valuation of systematic risk in the cross-section of credit default swap spreads', Quarterly Review of Economics and Finance, vol. 64, pp. 183-195.
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© 2016 Board of Trustees of the University of Illinois.We analyze the pricing of systematic risk factors in credit default swap (CDS) contracts in a two-stage empirical framework. Firstly we estimate contract-specific sensitivities (betas) to several systematic risk factors by time-series regressions using quoted CDS spreads of 339 U.S. entities from January 2004 to December 2010. Secondly, we show that these contract-specific sensitivities are cross-sectionally priced in CDS spreads after controlling for individual risk factors. We find that the credit market climate, the Cross-market Correlation, and the market volatility explain CDS spread changes and that their corresponding sensitivities (betas) are particularly priced in the cross-section. Our basic risk factors explain about 83% (90%) of the CDS spreads prior to (during) the crisis.

Craddock, M. 2017, 'Fundamental solutions for the two dimensional affine group and Hn+1', Journal of Mathematical Analysis and Applications, vol. 445, no. 1, pp. 953-970.
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© 2016 Elsevier Inc.We derive the wave and heat kernels on the ax+b group, as well as the fundamental solution of the group Laplacian. We make particular use of the Kontorovich–Lebedev transform and a recent result of the author to produce new expressions for these kernels. Our results easily extend to the hyperbolic space Hn+1 for any n and the explicit formulas are given in n dimensions.

Dewynne, J. & El-Hassan, N. 2017, 'The Valuation of Self-funding Instalment Warrants', International Journal of Theoretical and Applied Finance, vol. 20, no. 4.

Ekstrom, E., Glover, K. & Leniec, M. 2017, 'Dynkin games with heterogeneous beliefs', Journal of Applied Probability, vol. 54, no. 1, pp. 236-251.

He, X. & Shi, L. 2017, 'Index Portfolio and Welfare Analysis Under Heterogeneous Beliefs', Journal of Banking and Finance, vol. 75, pp. 64-79.
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He, X. & Treich, N. 2017, 'Prediction market prices under risk aversion and heterogeneous beliefs', Journal of Mathematical Economics, vol. 70, pp. 105-114.
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He, X.Z., Lütkebohmert, E. & Xiao, Y. 2017, 'Rollover Risk and Credit Risk under Time-varying Margin', Quantitative Finance, vol. 17, no. 3, pp. 455-469.
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For a firm financed by a mixture of collateralized (short-term) debt and uncollateralized (long-term) debt, we show that fluctuations in margin requirements, reflecting funding liquidity shocks, lead to increasing the firm’s default risk and credit spreads. The severity with which a firm is hit by increasing margin requirements highly depends on both its financing structure and debt maturity structure. Our results imply that an additional premium should be added when evaluating debt in order to account for rollover risks, especially for short-matured bonds. In terms of policy implications, our results strongly indicate that regulators should intervene fast to curtail margins in crisis periods and maintain a reasonably low margin level in order to effectively prevent creditors’ run on debt.

Henckel, T., Menzies, G.D., Moffatt, P.G. & Zizzo, D.J. 2017, 'Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence'.

Hinz, J. & Yee, J. 2017, 'Stochastic switching for partially observable dynamics and optimal asset allocation', International Journal of Control, vol. 90, no. 3, pp. 569-581.
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© 2016 Informa UK Limited, trading as Taylor & Francis Group.In industrial applications, optimal control problems frequently appear in the context of decision-making under incomplete information. In such framework, decisions must be adapted dynamically to account for possible regime changes of the underlying dynamics. Using stochastic filtering theory, Markovian evolution can be modelled in terms of latent variables, which naturally leads to high-dimensional state space, making practical solutions to these control problems notoriously challenging. In our approach, we utilise a specific structure of this problem class to present a solution in terms of simple, reliable, and fast algorithms. The algorithms presented in this paper have already been implemented in an R package.

Kardaras, C., Oblłój, J. & Platen, E. 2017, 'The numéraire property and long-term growth optimality for drawdown-constrained investments', Mathematical Finance, vol. 27, no. 1, pp. 68-95.
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We consider the portfolio choice problem for a long-run investor in a general continuous semimartingale model. We combine the decision criterion of pathwise growth optimality with a flexible specification of attitude toward risk, encoded by a linear drawdown constraint imposed on admissible wealth processes. We define the constrained numéraire property through the notion of expected relative return and prove that drawdown-constrained numéraire portfolio exists and is unique, but may depend on the investment horizon. However, when sampled at the times of its maximum and asymptotically as the time-horizon becomes distant, the drawdown-constrained numéraire portfolio is given explicitly through a model-independent transformation of the unconstrained numéraire portfolio. The asymptotically growth-optimal strategy is obtained as limit of numéraire strategies on finite horizons.

Karlsson, P., Pilz, K. & Schlogl, E. 2017, 'Calibrating a Market Model with Stochastic Volatility to Commodity and Interest Rate Risk', Quantitative Finance, vol. 17, no. 6, pp. 907-925.

Khan, M.S., Scheule, H. & Wu, E. 2017, 'Funding liquidity and bank risk taking', Journal of Banking and Finance.
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© 2016 Elsevier B.V.This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks' funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.

Kordzakhia, N., Novikov, A. & Ycart, B. 2017, 'Approximations for weighted Kolmogorov–Smirnov distributions via boundary crossing probabilities', Statistics and Computing, pp. 1-11.
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© 2016 The Author(s)A statistical application to Gene Set Enrichment Analysis implies calculating the distribution of the maximum of a certain Gaussian process, which is a modification of the standard Brownian bridge. Using the transformation into a boundary crossing problem for the Brownian motion and a piecewise linear boundary, it is proved that the desired distribution can be approximated by an n-dimensional Gaussian integral. Fast approximations are defined and validated by Monte Carlo simulation. The performance of the method for the genomics application is discussed.

Mansfield, D.F. & Dooley, A.H. 2017, 'The critical dimension for G-measures', Ergodic Theory and Dynamical Systems, vol. 37, no. 3, pp. 824-836.
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© 2015 Cambridge University Press.The critical dimension of an ergodic non-singular dynamical system is the asymptotic growth rate of sums of consecutive Radon-Nikodým derivatives. This has been shown to equal the average coordinate entropy for product odometers when the size of individual factors is bounded. We extend this result to G-measures with an asymptotic bound on the size of individual factors. Furthermore, unlike von Neumann-Krieger type, the critical dimension is an invariant property on the class of ergodic G-measures.

Nikitopoulos Sklibosios, C., Cheng, B. & Schlogl, E. 2017, 'Empirical Pricing Performance on Long Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?', Journal of Banking and Finance.
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Novikov, A., Alexander, S., Khordzakhia, N. & Ling, T. 2017, 'Pricing of Asian-type and basket options via bounds', Theory of Probability and Its Applications, vol. 61, no. 1, pp. 53-68.
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This paper sets out to provide a general framework for the pricing of average-type options via lower and upper bounds. This class of options includes Asian, basket, and options on the volume-weighted average price. The use of lower and upper bounds is proposed in response to the inherent difficulty in finding analytical representations for the true price of these options and the requirement for numerical procedures to be fast and efficient. We demonstrate that in some cases lower bounds allow for the dimensionality of the problem to be reduced and that these methods provide reasonable approximations to the price of the option.

Novikov, A., Alexander, S., Kordzakhia, N. & Ling, T. 2017, 'Pricing of asian-type and basket options via bounds', Theory of Probability and its Applications, vol. 61, no. 1, pp. 94-106.
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© 2017 Society for Industrial and Applied Mathematics.This paper sets out to provide a general framework for the pricing of average-type options via lower and upper bounds. This class of options includes Asian, basket, and options on the volume-weighted average price. The use of lower and upper bounds is proposed in response to the inherent difficulty in finding analytical representations for the true price of these options and the requirement for numerical procedures to be fast and efficient. We demonstrate that in some cases lower bounds allow for the dimensionality of the problem to be reduced and that these methods provide reasonable approximations to the price of the option.

Other

Alfeus, M., Grasselli, M. & Schlogl, E. 2017, 'A Consistent Stochastic Model of the Term Structure of Interest Rates for Multiple Tenors'.

Aliyev, N. & He, X. 2017, 'Ambiguous market making', SSRN.

He, X., Li, K. & Shi, L. 2017, 'Social interactions, stochastic volatility, and momentum', SSRN.

Hommes, C.H. & Li, K. 2017, 'Production Delay and Belief Distributions in a Continuous-Time Cobweb Model'.