Statistical modelling across price and time scales: a quantitative approach to modern financial regulation

Project Information

STAQAMOF

Grant agreement ID: 679836

DOI

10.3030/679836

Project closed

EC signature date 15 December 2015

Start date 1 October 2016

End date 30 September 2021

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 1 165 625,00

EU contribution

€ 1 165 625,00

Coordinated by

ECOLE POLYTECHNIQUE
France

Periodic Reporting for period 4 - STAQAMOF (Statistical modelling across price and time scales: a quantitative approach to modern financial regulation)

Reporting period: 2021-04-01 to 2021-09-30

Summary of the context and overall objectives of the project

In this project, we aim at solving important regulation issues on financial markets. Our approach in non-conventional in the sense that we use a financial engineering viewpoint: using tools from probability, statistics and stochastic control, we express important questions as clear and well-posed mathematical problems and try to provide solutions to them, paying of course attention to interpretation of our results.

We particularly focus on issues arising at the microstructure level: mitigating the effects of high frequency trading, optimal tick sizes, make-take fees systems, auctions, design of limit order books; and on the modelling and understanding of the volatility process

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

- Design of new, parsimonious models for the volatility process (called rough volatility models), together with associated pricing and hedging procedures. These models clearly outperform standard models in term of risk management.

- Understanding the rough nature of the volatility.

- Design of new and more efficient market design mechanisms at the microstructure level: optimal take sizes, make-take fees, auctions

- Building a framework enabling financial regulator to assess the impact of the various market participants on overall market quality.

- Design of an order book model leading to improved strategies in term of inventory risk.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

We expect to continue rethinking financial regulation. The natural next step is probably to focus on derivatives products. We wish to find ways to design them optimally in order to guarantee market users the best possible tools for risk management. A principal/agent type approach should be quite suitable to solve these new issues.

We also wish to understand other features of the volatility process, such as the so-called Zumbach effect, and relate them to the behavior of financial agents at the microscopic level. Quadratic Hawkes processes could probably represent a relevant modelling tool here.

Ecole Polytechnique