arXiv subjects

Ravi Kashyap

Publications and source records attributed to Ravi Kashyap.

30 records · Page 2Linked to original sources

arXiv2019

Solving the Equity Risk Premium Puzzle and Inching Towards a Theory of Everything

The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a few attempts done over the years to explain this anomaly: 1. Inclusion of highly unlikely events with low probability (Ugly state along with Good and Bad), or market crashes / Black Swans. 2. Slow moving habit, or time-varying subsistence level, added to the basic power utility function. 3. A separation of the inter-temporal elasticity of substitution and risk aversion, combined with long run risks which captures time varying economic uncertainty. We explore whether a fusion of the above approaches supplemented with better methods to handle the below reservations would provide a more realistic and yet tractable framework to tackle the various conundrums in the social sciences: 1. Unlimited ability of individuals to invest as compared to their ability to consume. 2. Lack of an objective measuring stick of value 3. Unintended consequences due to the dynamic nature of social systems 4. Relaxation of the transversality condition to avoid the formation of asset price bubbles 5. How durable is durable? Accounting for durable goods since nothing lasts forever The world we live in produces fascinating phenomenon despite (or perhaps, due to) being a hotchpotch of varying doses of the above elements. The rationale for a unified theory is that beauty can emerge from chaos since the best test for a stew is its taste. Many long standing puzzles seem to have been resolved using different techniques. The various explanations need to stand the test of time before acceptance; but then unexpected outcomes set in and new puzzles emerge. As real analysis and limits tell us: We are getting Closer and Closer; Yet it seems we are still Far Far Away...

q-fin.GN↗

arXiv2019

For Whom the Bell (Curve) Tolls: A to F, Trade Your Grade Based on the Net Present Value of Friendships with Financial Incentives

We discuss a possible solution to an unintended consequence of having grades, certificates, rankings and other diversions in the act of transferring knowledge; and zoom in specifically to the topic of having grades, on a curve. We conduct a thought experiment, taking a chapter (and some more?) from the financial markets, (where we trade pollution and what not?), to create a marketplace, where we can trade our grade, similar in structure to the interest rate swap. We connect this to broader problems that are creeping up, unintentionally, due to artificial labels we are attaching, to ourselves. The policy and philosophical implications of our arguments are to suggest that all trophies that we collect (including certificates, grades, medals etc.) should be viewed as personal equity or private equity (borrowing another widely used term in finance) and we should not use them to determine the outcomes in any selection criteria except have a cutoff point: either for jobs, higher studies, or, financial scholarships, other than for entertainment or spectator sports. We suggest alternate methods for grading and performance assessment and put forth tests for teaching and learning similar to the Turing Test for intelligence.

q-fin.GN↗

arXiv2019

Securities Lending Strategies: Exclusive Valuations and Auction Bids

We derive valuations of a portfolio of financial instruments from a securities lending perspective, under different assumptions, and show a weighting scheme that converges to the true valuation. We illustrate conditions under which our alternative weighting scheme converges faster to the true valuation when compared to the minimum variance weighting. This weighting scheme is applicable in any situation where multiple forecasts are made and we need a methodology to combine them. Our valuations can be useful either to derive a bidding strategy for an exclusive auction or to design an appropriate auction mechanism, depending on which side of the fence a participant sits (whether the interest is to procure the rights to use a portfolio for making stock loans such as for a lending desk, or, to obtain additional revenue from a portfolio such as from the point of view of a long only asset management firm). Lastly, we run simulations to establish numerical examples for the set of valuations and for various bidding strategies corresponding to different auction settings.

q-fin.PR↗

arXiv2019

The Perfect Marriage and Much More: Combining Dimension Reduction, Distance Measures and Covariance

We develop a novel methodology based on the marriage between the Bhattacharyya distance, a measure of similarity across distributions of random variables, and the Johnson-Lindenstrauss Lemma, a technique for dimension reduction. The resulting technique is a simple yet powerful tool that allows comparisons between data-sets representing any two distributions. The degree to which different entities, (markets, universities, hospitals, cities, groups of securities, etc.), have different distance measures of their corresponding distributions tells us the extent to which they are different, aiding participants looking for diversification or looking for more of the same thing. We demonstrate a relationship between covariance and distance measures based on a generic extension of Stein's Lemma. We consider an asset pricing application and then briefly discuss how this methodology lends itself to numerous market-structure studies and even applications outside the realm of finance / social sciences by illustrating a biological application. We provide numerical illustrations using security prices, volumes and volatilities of both these variables from six different countries.

q-fin.TR↗

arXiv2019

A Tale of Two Consequences: Intended and Unintended Outcomes of the Japan TOPIX Tick Size Changes

We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2104. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change. We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird`s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!

q-fin.TR↗

arXiv2019

Auction Theory Adaptations for Real Life Applications

We develop extensions to auction theory results that are useful in real life scenarios. 1. Since valuations are generally positive we first develop approximations using the log-normal distribution. This would be useful for many finance related auction settings since asset prices are usually non-negative. 2. We formulate a positive symmetric discrete distribution, which is likely to be followed by the total number of auction participants, and incorporate this into auction theory results. 3. We develop extensions when the valuations of the bidders are interdependent and incorporate all the results developed into a final combined realistic setting. 4. Our methods can be a practical tool for bidders and auction sellers to maximize their profits. The models developed here could be potentially useful for inventory estimation and for wholesale procurement of financial instruments and also non-financial commodities. All the propositions are new results and they refer to existing results which are stated as Lemmas.

cs.GT↗

arXiv2017

Fighting Uncertainty with Uncertainty: A Baby Step

We can overcome uncertainty with uncertainty. Using randomness in our choices and in what we control, and hence in the decision making process, could potentially offset the uncertainty inherent in the environment and yield better outcomes. The example we develop in greater detail is the news-vendor inventory management problem with demand uncertainty. We briefly discuss areas, where such an approach might be helpful, with the common prescription, "Don't Simply Optimize, Also Randomize; perhaps best described by the term - Randoptimization". 1. News-vendor Inventory Management 2. School Admissions 3. Journal Submissions 4. Job Candidate Selection 5. Stock Picking 6. Monetary Policy This methodology is suitable for the social sciences since the primary source of uncertainty are the members of the system themselves and presently, no methods are known to fully determine the outcomes in such an environment, which perhaps would require being able to read the minds of everyone involved and to anticipate their actions continuously. Admittedly, we are not qualified to recommend whether such an approach is conducive for the natural sciences, unless perhaps, bounds can be established on the levels of uncertainty in a system and it is shown conclusively that a better understanding of the system and hence improved decision making will not alter the outcomes.

q-fin.GN↗

arXiv2017

Financial Services, Economic Growth and Well-Being: A Four-Pronged Study

A four-pronged approach to dealing with Social Science Phenomenon is outlined. This methodology is applied to Financial Services, Economic Growth and Well-Being. The four prongs are like the four directions for an army general looking for victory. Just like the four directions, we need to be aware that there is a degree of interconnectedness in the below four prongs. -Uncertainty Principle of the Social Sciences -Responsibilities of Fiscal Janitors -Need for Smaller Organizations -Redirecting Growth that Generates Garbage The importance of gaining a more profound comprehension of welfare and delineating its components into those that result from an increase in goods and services, and hence can be attributed to economic growth, and into those that are not related to economic growth but lead to a better quality of life, is highlighted. The reasoning being that economic growth alone is an inadequate indicator of well-being. Hand in hand with a better understanding of the characteristics of welfare, comes the need to consider the metrics we currently have that gauge economic growth and supplement those with measures that capture well-being more holistically.

econ.GN↗

arXiv2017

Microstructure under the Microscope: Tools to Survive and Thrive in The Age of (Too Much) Information

Market Microstructure is the investigation of the process and protocols that govern the exchange of assets with the objective of reducing frictions that can impede the transfer. In financial markets, where there is an abundance of recorded information, this translates to the study of the dynamic relationships between observed variables, such as price, volume and spread, and hidden constituents, such as transaction costs and volatility, that hold sway over the efficient functioning of the system. "My dear, here we must process as much data as we can, just to stay in business. And if you wish to make a profit you must process at least twice as much data." - Red Queen to Alice in Hedge-Fund-Land. In this age of (Too Much) Information, it is imperative to uncover nuggets of knowledge (signal) from buckets of nonsense (noise). To aid in this effort to extract meaning from chaos and to gain a better understanding of the relationships between financial variables, we summarize the application of the theoretical results from (Kashyap 2016b) to microstructure studies. The central concept rests on a novel methodology based on the marriage between the Bhattacharyya distance, a measure of similarity across distributions, and the Johnson Lindenstrauss Lemma, a technique for dimension reduction, providing us with a simple yet powerful tool that allows comparisons between data-sets representing any two distributions. We provide an empirical illustration using prices, volumes and volatilities across seven countries and three different continents. The degree to which different markets or sub groups of securities have different measures of their corresponding distributions tells us the extent to which they are different. This can aid investors looking for diversification or looking for more of the same thing.

q-fin.TR↗

arXiv2017

Solving Society's Big Ills, A Small Step

We look at a collection of conjectures with the unifying message that smaller social systems, tend to be less complex and can be aligned better, towards fulfilling their intended objectives. We touch upon a framework, referred to as the four pronged approach that can aid the analysis of social systems. The four prongs are: 1. The Uncertainty Principle of the Social Sciences 2. The Objectives of a Social System or the Responsibilities of the Players 3. The Need for Smaller Organizations 4. Redirecting Unintended Outcomes Smaller organizations mitigating the disruptive effects of corruption is discussed and also the need for organizations, whose objective is to foster the development of other smaller organizations. We consider a way of life, which is about respect for knowledge and a desire to seek it. Knowledge can help eradicate ignorance, but the accumulation of knowledge can lead to overconfidence. Hence it becomes important to instill an attitude that does not knowledge too seriously, along with the thirst for knowledge. All of this is important to create an environment that is conducive for smaller organizations and can be viewed as a natural extension of studies that fall under the wider category of understanding factors and policies aimed at increasing the welfare or well-being to society.

q-fin.GN↗

arXiv2016

The Circle of Investment: Connecting the Dots of the Portfolio Management Cycle...

We will look at the entire cycle of the investment process relating to all aspects of, formulating an investment hypothesis, constructing a portfolio based on that, executing the trades to implement it, on-going risk management, periodically measuring the performance of the portfolio, and rebalancing the portfolio either due to an increase in the risk parameters or due to a deviation from the intended asset allocation. We provide several illustrative analogies that are meant to intuitively explain the pleasures and the pitfalls that can arise while managing a portfolio. If we consider the entire investment management procedure as being akin to connecting the dots of a circle, then the Circle of Investment can be represented as a dotted circle with many dots falling approximately on the circumference and with no clue about the exact location of the centre or the length of the radius. We represent the investment process as a dotted circle since there is a lot of ambiguity in the various steps involved. The circle also indicates the repetitive nature of many steps that are continuously carried out while investing. This work introduces two new points pertaining to this dotted circle and improves the ability, to understand how far-off this dotted circle is, from a more well-defined circle and, to create a well-formed circle. The two innovations we introduce are: 1. The first, relating to the limitations that apply to any finding in the social sciences, would be the additional point we introduce that lies near the centre of the circle. We title this as, 'The Uncertainty Principle of the Social Sciences'. 2. The second, relating to establishing confidence levels in a systematic manner for each view we associate with a security or group of securities as required by the Black-Litterman framework, would be the new point we present near the circumference of the circle.

q-fin.PM↗

arXiv2016

Dynamic Multi-Factor Bid-Offer Adjustment Model: A Feedback Mechanism for Dealers (Market Makers) to Deal (Grapple) with the Uncertainty Principle of the Social Sciences

The author seeks to develop a model to alter the bid-offer spread, currently quoted by market makers, that varies with the market and trading conditions. The dynamic nature of financial markets and trading, as with the rest of social sciences, where changes can be observed and decisions can be made by participants to influence the system, means that this model has to be adaptive and include a feedback loop that alters the bid-offer adjustment based on the modifications observed in the market and trading conditions, without a significant time delay. The factors used to adjust the spread are price volatility, which is publicly observable, and trade count and volume, which are generally known only to the market maker, in various instruments over different historical durations in time. The contributions of each factor to the bid-offer adjustment are computed separately and then consolidated to produce a very adaptive bid-offer quotation. The author uses the currency markets to build the sample model because they are extremely liquid and trading in them is not as transparent as other financial instruments, such as equities. Simulating the number of trades and the average size of trades from a lognormal distribution, the parameters of the lognormal distributions are chosen such that the total volume in a certain interval matches the volume publicly mentioned by currency trading firms. This methodology can easily be extended to other financial instruments and possibly to any product with the ability to make electronic price quotations, or can even be used to periodically perform manual price updates on products that are traded non-electronically.

econ.GN↗