Research articles for the 2019-12-22

An Artificial Intelligence approach to Shadow Rating
Angela Rita Provenzano,Daniele Trifirò,Nicola Jean,Giacomo Le Pera,Maurizio Spadaccino,Luca Massaron,Claudio Nordio

We analyse the effectiveness of modern deep learning techniques in predicting credit ratings over a universe of thousands of global corporate entities obligations when compared to most popular, traditional machine-learning approaches such as linear models and tree-based classifiers. Our results show a adequate accuracy over different rating classes when applying categorical embeddings to artificial neural networks (ANN) architectures.

Argentum: a collaborative saving and investment platform for unstable countries
Leonardo Belen,Alejandro Baranek,Xavier Gonzalez

A crypto coin designed to provide a stabilization instrument backed up by minded like financial investments instruments to maintain the purchase value of savings across time, in order to construct new tools for unstable economies.

Banking History and Archives in Latin America
Marichal, Carlos
In recent years, business history has become a rich and varied terrain for research in Latin America. In this essay, I will present an overview of key aspects of banking history in the region, with an emphasis on the sources that are available in Argentina and Mexico. The extensive archives that have been built up in both countries offer historians the opportunity to study an array of topics: histories of individual banks; the evolution of banking systems; the relation between banking firms and industrial and agricultural development; the role of banks in government finance; the unique historical trajectories of central banks; the rise and relative decline of state-development banks; and the complex history of foreign banks in Latin America from the nineteenth century to the present.

Comparison of various risk measures for an optimal portfolio
Alev Meral

In this paper, we search for optimal portfolio strategies in the presence of various risk measure that are common in financial applications. Particularly, we deal with the static optimization problem with respect to Value at Risk, Expected Loss and Expected Utility Loss measures. To do so, under the Black- Scholes model for the financial market, Martingale method is applied to give closed-form solutions for the optimal terminal wealths; then via representation problem the optimal portfolio strategies are achieved. We compare the performances of these measures on the terminal wealths and optimal strategies of such constrained investors. Finally, we present some numerical results to compare them in several respects to give light to further studies.

Evolving ab initio trading strategies in heterogeneous environments
David Rushing Dewhurst,Yi Li,Alexander Bogdan,Jasmine Geng

Securities markets are quintessential complex adaptive systems in which heterogeneous agents compete in an attempt to maximize returns. Species of trading agents are also subject to evolutionary pressure as entire classes of strategies become obsolete and new classes emerge. Using an agent-based model of interacting heterogeneous agents as a flexible environment that can endogenously model many diverse market conditions, we subject deep neural networks to evolutionary pressure to create dominant trading agents. After analyzing the performance of these agents and noting the emergence of anomalous superdiffusion through the evolutionary process, we construct a method to turn high-fitness agents into trading algorithms. We backtest these trading algorithms on real high-frequency foreign exchange data, demonstrating that elite trading algorithms are consistently profitable in a variety of market conditions---even though these algorithms had never before been exposed to real financial data. These results provide evidence to suggest that developing \textit{ab initio} trading strategies by repeated simulation and evolution in a mechanistic market model may be a practical alternative to explicitly training models with past observed market data.

From Disequilibrium Markets to Equilibrium
Christian Lax,Torsten Trimborn

The modeling of financial markets as disequilibrium models by ordinary differential equations has become a popular modeling tool. One famous example of such a model is the Beja-Goldman model(The Journal of Finance, 1980) which we consider in this paper. We study the passage from disequilibrium dynamics to equilibrium. Mathematically, this limit corresponds to an asymptotic limit also known as a Tikhonov-Fenichel reduction. Furthermore, we analyze the stability of the reduced equilibrium model and discuss the economic implications. We conduct several numerical examples to visualize and support our analysis.

Grouping of Contracts in Insurance using Neural Networks
Mark Kiermayer,Christian Weiß

Despite the high importance of grouping in practice, there exists little research on the respective topic. The present work presents a complete framework for grouping and a novel method to optimize model points. Model points are used to substitute clusters of contracts in an insurance portfolio and thus yield a smaller, computationally less burdensome portfolio. This grouped portfolio is controlled to have similar characteristics as the original portfolio. We provide numerical results for term life insurance and defined contribution plans, which indicate the superiority of our approach compared to K-means clustering, a common baseline algorithm for grouping. Lastly, we show that the presented concept can optimize a fixed number of model points for the entire portfolio simultaneously. This eliminates the need for any pre-clustering of the portfolio, e.g. by K-means clustering, and therefore presents our method as an entirely new and independent methodology.

How connected is too connected? Impact of network topology on systemic risk and collapse of complex economic systems
Aymeric Vié,Alfredo J. Morales

Economic interdependencies have become increasingly present in globalized production, financial and trade systems. While establishing interdependencies among economic agents is crucial for the production of complex products, they may also increase systemic risks due to failure propagation. It is crucial to identify how network connectivity impacts both the emergent production and risk of collapse of economic systems. In this paper we propose a model to study the effects of network structure on the behavior of economic systems by varying the density and centralization of connections among agents. The complexity of production increases with connectivity given the combinatorial explosion of parts and products. Emergent systemic risks arise when interconnections increase vulnerabilities. Our results suggest a universal description of economic collapse given in the emergence of tipping points and phase transitions in the relationship between network structure and risk of individual failure. This relationship seems to follow a sigmoidal form in the case of increasingly denser or centralized networks. The model sheds new light on the relevance of policies for the growth of economic complexity, and highlights the trade-off between increasing the potential production of the system and its robustness to collapse. We discuss the policy implications of intervening in the organization of interconnections and system features, and stress how different network structures and node characteristics suggest different directions in order to promote complex and robust economic systems.

Monetary Policy and Wealth Inequalities in Great Britain: Assessing the role of unconventional policies for a decade of household data
Anastasios Evgenidis,Apostolos Fasianos

This paper explores whether unconventional monetary policy operations have redistributive effects on household wealth. Drawing on household balance sheet data from the Wealth and Asset Survey, we construct monthly time series indicators on the distribution of different asset types held by British households for the period that the monetary policy switched as the policy rate reached the zero lower bound (2006-2016). Using this series, we estimate the response of wealth inequalities on monetary policy, taking into account the effect of unconventional policies conducted by the Bank of England in response to the Global Financial Crisis. Our evidence reveals that unconventional monetary policy shocks have significant long-lasting effects on wealth inequality: an expansionary monetary policy in the form of asset purchases raises wealth inequality across households, as measured by their Gini coefficients of net wealth, housing wealth, and financial wealth. The evidence of our analysis helps to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.

Speculative Attacks and Investor Attention
Piccoli, Pedro
This paper presents the first evidence that retail investors play a central role in a speculative attack. Investigating the attacks that affected several emerging economies in the second semester of 2018, I document a strong influence of investor attention on the price and risk of the currency under attack, and this influence monotonically rises with the increase of the attacks’ severity. Moreover, this association is absent outside of the attacks or for those emerging currencies that did not experience an attack in the sample period. These findings are robust to several alternative explanations and provide further support for the importance of retail investors to asset pricing.

Term structure modeling for multiple curves with stochastic discontinuities
Claudio Fontana,Zorana Grbac,Sandrine Gümbel,Thorsten Schmidt

We develop a general term structure framework taking stochastic discontinuities explicitly into account. Stochastic discontinuities are a key feature in interest rate markets, as for example the jumps of the term structures in correspondence to monetary policy meetings of the ECB show. We provide a general analysis of multiple curve markets under minimal assumptions in an extended HJM framework and provide a fundamental theorem of asset pricing based on NAFLVR. The approach with stochastic discontinuities permits to embed market models directly, unifying seemingly different modeling philosophies. We also develop a tractable class of models, based on affine semimartingales, going beyond the requirement of stochastic continuity.

The option pricing model based on time values: an application of the universal approximation theory on unbounded domains
Yang Qu,Ming-Xi Wang

The mathematical theory of neural networks is ``meant to tell us what is possible and, sometimes equally importantly, what is not." This paper contributes a case that fits into this principle.

We propose that "option price or time value" is a natural hyperparameter in the design of neural network option models. Hutchinson, Lo and Poggio asked the question that if learning networks can learn the Black-Scholes formula, and they studied the network $(S_t/K, \tau) \to C_t/K$ where $S_t, K, \tau, C_t$ are the underlying price, strike, time to maturity and option price. In this paper we propose a novel decision function and study the network $(S_t/K, \tau) \to V_t/K$ where $V_t$ is the time value. Empirical experiments will be carried out to demonstrate that this new decision function significantly improves Hutchinson-Lo-Poggio's model by faster learning and better generalization performance.

We prove that a shallow neural network with the logistic activation is a universal approximator in $L^{2}(\mathbb{R} \times [0, 1])$. As a corollary $V_t/K$ but not $C_t/K$ can be approximated by superpositions of logistic functions on $\mathbb{R}^+ \times [0, 1]$. This justifies the benefit of time value oriented decision functions in option pricing models.