Research articles for the 2020-10-04

COVID-19, economic policy uncertainty and stock market crash risk
Zhifeng Liu,Toan Luu Duc Huynh,Jianjun Sun,Peng-Fei Dai

This paper investigates the impact of economic policy uncertainty (EPU) on the crash risk of US stock market during the COVID-19 pandemic. To this end, we use the GARCH-S (GARCH with skewness) model to estimate daily skewness as a proxy for the stock market crash risk. The empirical results show the significantly negative correlation between EPU and stock market crash risk, indicating the aggravation of EPU increase the crash risk. Moreover, the negative correlation gets stronger after the global COVID-19 outbreak, which shows the crash risk of the US stock market will be more affected by EPU during the epidemic.

Convergence of utility indifference prices to the superreplication price in a multiple-priors framework
Romain Blanchard,Laurence Carassus

This paper formulates an utility indifference pricing model for investors trading in a discrete time financial market under non-dominated model uncertainty. The investors preferences are described by strictly increasing concave random functions defined on the positive axis. We prove that under suitable conditions the multiple-priors utility indifference prices of a contingent claim converge to its multiple-priors superreplication price.

We also revisit the notion of certainty equivalent for random utility functions and establish its relation with the absolute risk aversion.

Heterogeneous effects of waste pricing policies
Marica Valente

Using machine learning methods in a quasi-experimental setting, I study the heterogeneous effects of waste prices -- unit prices on household unsorted waste disposal -- on waste demands and social welfare. First, using a unique panel of Italian municipalities with large variation in prices and observables, I show that waste demands are nonlinear. I find evidence of nudge effects at low prices, and increasing elasticities at high prices driven by income effects and waste habits before policy. Second, I combine municipal level price effects on unsorted and recycling waste with their impacts on municipal and pollution costs. I estimate overall welfare benefits after three years of adoption, when waste prices cause significant waste avoidance. As waste avoidance is highest at low prices, this implies that even low prices can substantially change waste behaviors and improve welfare.

Knowledge Discovery in Cryptocurrency Transactions: A Survey
Xiao Fan Liu,Xin-Jian Jiang,Si-Hao Liu,Chi Kong Tse

Cryptocurrencies gain trust in users by publicly disclosing the full creation and transaction history. In return, the transaction history faithfully records the whole spectrum of cryptocurrency user behaviors. This article analyzes and summarizes the existing research on knowledge discovery in the cryptocurrency transactions using data mining techniques. Specifically, we classify the existing research into three aspects, i.e., transaction tracings and blockchain address linking, the analyses of collective user behaviors, and the study of individual user behaviors. For each aspect, we present the problems, summarize the methodologies, and discuss major findings in the literature. Furthermore, an enumeration of transaction data parsing and visualization tools and services is also provided. Finally, we outline several future directions in this research area, such as the current rapid development of Decentralized Finance (De-Fi) and digital fiat money.

Risk-neutral pricing for APT
Laurence Carassus,Miklos Rasonyi

We consider infinite dimensional optimization problems motivated by the financial model called Arbitrage Pricing Theory. Using probabilistic and functional analytic tools, we provide a dual characterization of the super-replication cost. Then, we show the existence of optimal strategies for investors maximizing their expected utility and the convergence of their reservation prices to the super-replication cost as their risk-aversion tends to infinity.

Small-time, large-time and $H\to 0$ asymptotics for the Rough Heston model
Martin Forde,Stefan Gerhold,Benjamin Smith

We characterize the behaviour of the Rough Heston model introduced by Jaisson\&Rosenbaum \cite{JR16} in the small-time, large-time and $\alpha \to 1/2$ (i.e. $H\to 0$) limits. We show that the short-maturity smile scales in qualitatively the same way as a general rough stochastic volatility model (cf.\ \cite{FZ17}, \cite{FGP18a} et al.), and the rate function is equal to the Fenchel-Legendre transform of a simple transformation of the solution to the same Volterra integral equation (VIE) that appears in \cite{ER19}, but with the drift and mean reversion terms removed. The solution to this VIE satisfies a space-time scaling property which means we only need to solve this equation for the moment values of $p=1$ and $p=-1$ so the rate function can be efficiently computed using an Adams scheme or a power series, and we compute a power series in the log-moneyness variable for the asymptotic implied volatility which yields tractable expressions for the implied vol skew and convexity. The limiting asymptotic smile in the large-maturity regime is obtained via a stability analysis of the fixed points of the VIE, and is the same as for the standard Heston model in \cite{FJ11}. Finally, using L\'{e}vy's convergence theorem, we show that the log stock price $X_t$ tends weakly to a non-symmetric random variable $X^{(1/2)}_t$ as $\alpha \to 1/2$ (i.e. $H\to 0$) whose mgf is also the solution to the Rough Heston VIE with $\alpha=1/2$, and we show that $X^{(1/2)}_t/\sqrt{t}$ tends weakly to a non-symmetric random variable as $t\to 0$, which leads to a non-flat non-symmetric asymptotic smile in the Edgeworth regime. We also show that the third moment of the log stock price tends to a finite constant as $H\to 0$ (in contrast to the Rough Bergomi model discussed in \cite{FFGS20} where the skew flattens or blows up) and the $V$ process converges on pathspace to a random tempered distribution.