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Research projects 2017

1. High-Yield Deposits and Financial Stability

This project explores the relationship between the maximum deposit rates of banks, monitored by the Russian Central Bank, and the financial stability of commercial banks. Preliminary results of the study show that the aggressive funding policy of banks through offering of high interest rate on deposit products leads to an increase in the riskiness of their assets and is positively associated with the probability of revocation of their banking license.

2. High Frequency Trading and Market Quality

We construct a model in order to analyze an impact of the high frequency trading on various characteristics of market quality, such as liquidity, trading cost, and price efficiency. We assume that some of the high frequency traders do not initially possess any private information, but they have a superior technology that may allow them to "filter out" the strategies of the other types of traders. In particular, using their superior technology, these traders may learn how the informed types would trade in order to take advantage of their private information and gain trading profits. In addition, we assume that there are some privately informed traders who can quickly detect and trade on information that is officially public, but which takes other traders time to detect. Their algorithms can be keyed to take immediate trading decisions based on these informational events, before less speedy traders can act, that is, they also trade at high speed, but are less publicly visible. The key facet of this type of activity is that when there are multiple informed traders acting on the same information, their information is by definition perfectly correlated. Using the BNE equilibrium construct, Back, Cao and Willard (2000) found that equilibrium fails to exist in this perfect correlation situation. In the BSE construct, the informed trade more cautiously and we therefore reverse Back, Cao and Willard's finding, suggesting that the BSE equilibrium concept is the correct one in general. To adequately capture the leader-follower effects, it is necessary to solve the model in which the population of informed traders and liquidity providers are each finite. In the dynamic setting, this requirement poses significant technical challenges. We have developed and applied a new solution method to meet these challenges.

3. Optimal Execution Algorithms for strategic traders

We consider the optimal execution strategy in the case when multiple traders are involved in trading. Our approach allows us to explore the details of the interaction of traders in the process of optimal portfolio liquidation. To this end, we find dynamic Nash equilibria in the presence of few traders in the market under different assumptions about the dynamics of market prices of the asset and the information that traders have, describe the properties of ach equilibrium, and find necessary and sufficient conditions under which the optimal strategy is aggressive or passive.

4. Firm‐specific uncertainty around earnings announcements and the cross‐section of stock returns

We examine whether the firm‐specific component of ex‐ante earnings‐related uncertainty is a priced characteristic for stocks. We use option‐implied expected earnings announcement day jump variance as the measure for uncertainty and extract the firm‐specific component by isolating the portion, correlated with the squared market risk sensitivity. Time series asset pricing tests, applied to the portfolios sorted on firm-specific earnings‐related uncertainty, yield that this measure has explanatory power for stock returns: We find economically and statistically significant returns in excess of both the Carhart (1997) model and Fama‐ French (2015) model predictions for a portfolio which loads on firm‐specific earnings‐related uncertainty. We show that this result is driven by large cap stocks and is independent of operating profitability.


 

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