New articles on Quantitative Finance

[1] 2311.14731

Deep State-Space Model for Predicting Cryptocurrency Price

Our work presents two fundamental contributions. On the application side, we tackle the challenging problem of predicting day-ahead crypto-currency prices. On the methodological side, a new dynamical modeling approach is proposed. Our approach keeps the probabilistic formulation of the state-space model, which provides uncertainty quantification on the estimates, and the function approximation ability of deep neural networks. We call the proposed approach the deep state-space model. The experiments are carried out on established cryptocurrencies (obtained from Yahoo Finance). The goal of the work has been to predict the price for the next day. Benchmarking has been done with both state-of-the-art and classical dynamical modeling techniques. Results show that the proposed approach yields the best overall results in terms of accuracy.

[2] 2311.14735

Generative Machine Learning for Multivariate Equity Returns

The use of machine learning to generate synthetic data has grown in popularity with the proliferation of text-to-image models and especially large language models. The core methodology these models use is to learn the distribution of the underlying data, similar to the classical methods common in finance of fitting statistical models to data. In this work, we explore the efficacy of using modern machine learning methods, specifically conditional importance weighted autoencoders (a variant of variational autoencoders) and conditional normalizing flows, for the task of modeling the returns of equities. The main problem we work to address is modeling the joint distribution of all the members of the S&P 500, or, in other words, learning a 500-dimensional joint distribution. We show that this generative model has a broad range of applications in finance, including generating realistic synthetic data, volatility and correlation estimation, risk analysis (e.g., value at risk, or VaR, of portfolios), and portfolio optimization.

[3] 2311.14738

The Impact Of Interest Rates On Firms Financial Decisions

Financial decisions are the decisions that managers take with regard to the finances of a company. This article aims to examine and explain the effect of interest rates on economic and financial decisions such as investment, funding, and dividend in a firm. This research uses the correlation coefficient analysis methods and descriptive methods to illustrate the relationship between interest rates and financial decisions. The data used in this research was obtained from several government reports and leading economic sources. The results of this research show that interest rates have a negatively insignificant effect on investment and funding decisions, but positively moderate effect on dividend decisions.

[4] 2311.14759

Forecasting Cryptocurrency Prices Using Deep Learning: Integrating Financial, Blockchain, and Text Data

This paper explores the application of Machine Learning (ML) and Natural Language Processing (NLP) techniques in cryptocurrency price forecasting, specifically Bitcoin (BTC) and Ethereum (ETH). Focusing on news and social media data, primarily from Twitter and Reddit, we analyse the influence of public sentiment on cryptocurrency valuations using advanced deep learning NLP methods. Alongside conventional price regression, we treat cryptocurrency price forecasting as a classification problem. This includes both the prediction of price movements (up or down) and the identification of local extrema. We compare the performance of various ML models, both with and without NLP data integration. Our findings reveal that incorporating NLP data significantly enhances the forecasting performance of our models. We discover that pre-trained models, such as Twitter-RoBERTa and BART MNLI, are highly effective in capturing market sentiment, and that fine-tuning Large Language Models (LLMs) also yields substantial forecasting improvements. Notably, the BART MNLI zero-shot classification model shows considerable proficiency in extracting bullish and bearish signals from textual data. All of our models consistently generate profit across different validation scenarios, with no observed decline in profits or reduction in the impact of NLP data over time. The study highlights the potential of text analysis in improving financial forecasts and demonstrates the effectiveness of various NLP techniques in capturing nuanced market sentiment.

[5] 2311.14985

Temporal Volatility Surface Projection: Parametric Surface Projection Method for Derivatives Portfolio Risk Management

This study delves into the intricate realm of risk evaluation within the domain of specific financial derivatives, notably options. Unlike other financial instruments, like bonds, options are susceptible to broader risks. A distinctive trait characterizing this category of instruments is their non-linear price behavior relative to their pricing parameters. Consequently, evaluating the risk of these securities is notably more intricate when juxtaposed with analogous scenarios involving fixed-income instruments, such as debt securities. A paramount facet in options risk assessment is the inherent uncertainty stemming from first-order fluctuations in the underlying asset's volatility. The dynamic patterns of volatility fluctuations manifest striking resemblances to the interest rate risk associated with zero-coupon bonds. However, it is imperative to bestow heightened attention on this risk category due to its dependence on a more extensive array of variables and the temporal variability inherent in these variables. This study scrutinizes the methodological approach to risk assessment by leveraging the implied volatility surface as a foundational component, thereby diverging from the reliance on a singular estimate of the underlying asset's volatility.

[6] 2311.15180

Benchmarking Large Language Model Volatility

The impact of non-deterministic outputs from Large Language Models (LLMs) is not well examined for financial text understanding tasks. Through a compelling case study on investing in the US equity market via news sentiment analysis, we uncover substantial variability in sentence-level sentiment classification results, underscoring the innate volatility of LLM outputs. These uncertainties cascade downstream, leading to more significant variations in portfolio construction and return. While tweaking the temperature parameter in the language model decoder presents a potential remedy, it comes at the expense of stifled creativity. Similarly, while ensembling multiple outputs mitigates the effect of volatile outputs, it demands a notable computational investment. This work furnishes practitioners with invaluable insights for adeptly navigating uncertainty in the integration of LLMs into financial decision-making, particularly in scenarios dictated by non-deterministic information.

[7] 2311.15247

Information Content of Financial Youtube Channel: Case Study of 3PROTV and Korean Stock Market

We investigate the information content of 3PROTV, a south Korean financial youtube channel. In our sample we found evidence for the hypothesis that the channel have information content on stock selection, but only on negative sentiment. Positively mentioned stock had pre-announcement spike followed by steep fall in stock price around announcement period. Negatively mentioned stock started underperforming around the announcement period, with underreaction dynamics in post-announcement period. In the area of market timing, we found that change of sentimental tone of 3PROTV than its historical average predicts the lead value of Korean market portfolio return. Its predictive power cannot be explained by future change in news sentiment, future short term interest rate, and future liquidity risk.

[8] 2311.15333

Asymptotic Error Analysis of Multilevel Stochastic Approximations for the Value-at-Risk and Expected Shortfall

This article is a follow up to Cr\'epey, Frikha, and Louzi (2023), where we introduced a nested stochastic approximation algorithm and its multilevel acceleration for computing the value-at-risk and expected shortfall of a random financial loss. We establish central limit theorems for the renormalized errors associated with both algorithms and their averaged variations. Our findings are substantiated through numerical examples.

[9] 2311.15362

Application of Process Mining and Sequence Clustering in Recognizing an Industrial Issue

Process mining has become one of the best programs that can outline the event logs of production processes in visualized detail. We have addressed the important problem that easily occurs in the industrial process called Bottleneck. The analysis process was focused on extracting the bottlenecks in the production line to improve the flow of production. Given enough stored history logs, the field of process mining can provide a suitable answer to optimize production flow by mitigating bottlenecks in the production stream. Process mining diagnoses the productivity processes by mining event logs, this can help to expose the opportunities to optimize critical production processes. We found that there is a considerable bottleneck in the process because of the weaving activities. Through discussions with specialists, it was agreed that the main problem in the weaving processes, especially machines that were exhausted in overloading processes. The improvement in the system has measured by teamwork; the cycle time for process has improved to 91%, the worker's performance has improved to 96%,product quality has improved by 85%, and lead time has optimized from days and weeks to hours.

[10] 2311.15635

Discretization of continuous-time arbitrage strategies in financial markets with fractional Brownian motion

This study evaluates the practical usefulness of continuous-time arbitrage strategies designed to exploit serial correlation in fractional financial markets. Specifically, we revisit the strategies of \cite{Shiryaev1998} and \cite{Salopek1998} and transfer them to a real-world setting by distretizing their dynamics and introducing transaction costs. In Monte Carlo simulations with various market and trading parameter settings, we show that both are highly promising with respect to terminal portfolio values and loss probabilities. These features and complementary sparsity make them valuable additions to the toolkit of quantitative investors.

[11] 2311.15793

Supplement Liquidity based modeling of asset price bubbles via random matching

This is a supplement to the paper "Liquidity based modeling of asset price bubbles via random matching". The supplement is organized as follows. First, we prove Theorem 3.13 in [1] which provides the existence of the dynamical system D introduced in Definition 3.6 in [1]. Second, we show some properties of D which are summarized in Theorem 3.14 in [1]. In the following, we only state the basic setting and refer to [1] for definitions.

[12] 2311.15974

Adaptive Agents and Data Quality in Agent-Based Financial Markets

We present our Agent-Based Market Microstructure Simulation (ABMMS), an Agent-Based Financial Market (ABFM) that captures much of the complexity present in the US National Market System for equities (NMS). Agent-Based models are a natural choice for understanding financial markets. Financial markets feature a constrained action space that should simplify model creation, produce a wealth of data that should aid model validation, and a successful ABFM could strongly impact system design and policy development processes. Despite these advantages, ABFMs have largely remained an academic novelty. We hypothesize that two factors limit the usefulness of ABFMs. First, many ABFMs fail to capture relevant microstructure mechanisms, leading to differences in the mechanics of trading. Second, the simple agents that commonly populate ABFMs do not display the breadth of behaviors observed in human traders or the trading systems that they create. We investigate these issues through the development of ABMMS, which features a fragmented market structure, communication infrastructure with propagation delays, realistic auction mechanisms, and more. As a baseline, we populate ABMMS with simple trading agents and investigate properties of the generated data. We then compare the baseline with experimental conditions that explore the impacts of market topology or meta-reinforcement learning agents. The combination of detailed market mechanisms and adaptive agents leads to models whose generated data more accurately reproduce stylized facts observed in actual markets. These improvements increase the utility of ABFMs as tools to inform design and policy decisions.

[13] 2311.16004

Improved Data Generation for Enhanced Asset Allocation: A Synthetic Dataset Approach for the Fixed Income Universe

We present a novel process for generating synthetic datasets tailored to assess asset allocation methods and construct portfolios within the fixed income universe. Our approach begins by enhancing the CorrGAN model to generate synthetic correlation matrices. Subsequently, we propose an Encoder-Decoder model that samples additional data conditioned on a given correlation matrix. The resulting synthetic dataset facilitates in-depth analyses of asset allocation methods across diverse asset universes. Additionally, we provide a case study that exemplifies the use of the synthetic dataset to improve portfolios constructed within a simulation-based asset allocation process.

[14] 2311.14720

AI Use in Manuscript Preparation for Academic Journals

The emergent abilities of Large Language Models (LLMs), which power tools like ChatGPT and Bard, have produced both excitement and worry about how AI will impact academic writing. In response to rising concerns about AI use, authors of academic publications may decide to voluntarily disclose any AI tools they use to revise their manuscripts, and journals and conferences could begin mandating disclosure and/or turn to using detection services, as many teachers have done with student writing in class settings. Given these looming possibilities, we investigate whether academics view it as necessary to report AI use in manuscript preparation and how detectors react to the use of AI in academic writing.

[15] 2311.15222

Decision Tree Psychological Risk Assessment in Currency Trading

This research paper focuses on the integration of Artificial Intelligence (AI) into the currency trading landscape, positing the development of personalized AI models, essentially functioning as intelligent personal assistants tailored to the idiosyncrasies of individual traders. The paper posits that AI models are capable of identifying nuanced patterns within the trader's historical data, facilitating a more accurate and insightful assessment of psychological risk dynamics in currency trading. The PRI is a dynamic metric that experiences fluctuations in response to market conditions that foster psychological fragility among traders. By employing sophisticated techniques, a classifying decision tree is crafted, enabling clearer decision-making boundaries within the tree structure. By incorporating the user's chronological trade entries, the model becomes adept at identifying critical junctures when psychological risks are heightened. The real-time nature of the calculations enhances the model's utility as a proactive tool, offering timely alerts to traders about impending moments of psychological risks. The implications of this research extend beyond the confines of currency trading, reaching into the realms of other industries where the judicious application of personalized modeling emerges as an efficient and strategic approach. This paper positions itself at the intersection of cutting-edge technology and the intricate nuances of human psychology, offering a transformative paradigm for decision making support in dynamic and high-pressure environments.

[16] 2311.15355

Characterization of valid auxiliary functions for representations of extreme value distributions and their max-domains of attraction

In this paper we study two important representations for extreme value distributions and their max-domains of attraction (MDA), namely von Mises representation (vMR) and variation representation (VR), which are convenient ways to gain limit results. Both VR and vMR are defined via so-called auxiliary functions psi. Up to now, however, the set of valid auxiliary functions for vMR has neither been characterized completely nor separated from those for VR. We contribute to the current literature by introducing ''universal'' auxiliary functions which are valid for both VR and vMR representations for the entire MDA distribution families. Then we identify exactly the sets of valid auxiliary functions for both VR and vMR. Moreover, we propose a method for finding appropriate auxiliary functions with analytically simple structure and provide them for several important distributions.

[17] 2311.15548

Deficiency of Large Language Models in Finance: An Empirical Examination of Hallucination

The hallucination issue is recognized as a fundamental deficiency of large language models (LLMs), especially when applied to fields such as finance, education, and law. Despite the growing concerns, there has been a lack of empirical investigation. In this paper, we provide an empirical examination of LLMs' hallucination behaviors in financial tasks. First, we empirically investigate LLM model's ability of explaining financial concepts and terminologies. Second, we assess LLM models' capacity of querying historical stock prices. Third, to alleviate the hallucination issue, we evaluate the efficacy of four practical methods, including few-shot learning, Decoding by Contrasting Layers (DoLa), the Retrieval Augmentation Generation (RAG) method and the prompt-based tool learning method for a function to generate a query command. Finally, our major finding is that off-the-shelf LLMs experience serious hallucination behaviors in financial tasks. Therefore, there is an urgent need to call for research efforts in mitigating LLMs' hallucination.