Empirical findings in asset price dynamics revealed by quantitative modelling

Quantitative finance;Asset pricing model;Factor model;Connectedness;High-frequency trading;Market impact;Price impact;Optimal order execution

Sim, Min Kyu ; Deng, Shijie Huo, Xiaoming Industrial and Systems Engineering Pokutta, Sebastian Kim, Soohun Raval, Kautilya ; Deng, Shijie

University:Georgia Institute of Technology

Department:Industrial and Systems Engineering

关键词: Quantitative finance;    Asset pricing model;    Factor model;    Connectedness;    High-frequency trading;    Market impact;    Price impact;    Optimal order execution;   

Others  :  https://smartech.gatech.edu/bitstream/1853/54302/1/SIM-DISSERTATION-2014.pdf

美国|英语

来源: SMARTech Repository

【 摘 要 】

This dissertation addresses the fundamental question of what factors drive equity prices and investigates the mechanisms through which the drivers influence the price dynamics.The studies are based on the two different frequency levels of financial data.The first part aims to identify what systematic risk factors affect the expected return of stocks based on historical data with frequency being daily or monthly.The second part aims to explain how the hidden supply-demand of a stock affects the stock price dynamics based on market data observed at frequency levels generally between a millisecond and a second.With more and more financial market data becoming available, it greatly facilitates quantitative approaches for analyzing asset price dynamics and market microstructure problems.In the first part, we propose an econometric measure, terms as modularity, for characterizing the cluster structure in a universe of stocks.A high level of modularity implies that the cluster structure of the universe of stocks is highly evident, and low modularity implies a blurred cluster structure.The modularity measure is shown to be related to the cycle of the economy. In addition, individual stock's sensitivity to the modularity measure is shown to be related to its expected return.From 1992 to 2011, the average annual return of stocks with the lowest sensitivity exceeds that of the stocks with highest sensitivities by approximately 7.6%.Considerations of modularity as an asset pricing factor expand the investment opportunity set to passive investors.In the second part, we analyze the effect of hidden demands/supplies in equity trading market on the stock price dynamics.We propose a statistical estimation model for average hidden liquidity based on the limit orderbook data.Not only the estimated hidden liquidity explains the probabilistic property in market microstructure better, it also refines the existing price impact model and achieves higher explanation powers.Our enhanced price impact model offers a base for devising optimal order execution strategies.After we develop an optimal execution strategy based on the price impact function, the advantage of this strategy over benchmark strategies is tested on a simulated stock trading model calibrated by historical data.Simulation tests indicate that our strategy yields significant savings in transaction cost over the benchmark strategies.