Can Agent-Based Models Probe Market Microstructure? Donovan Platt, Tim Gebbie (2016) arXiv.org

https://arxiv.org/abs/1611.08510

Can Agent-Based Models Probe Market Microstructure?

Authors: Donovan Platt, Tim Gebbie

(Submitted on 25 Nov 2016)

Abstract: We extend prior evidence that naively using intraday agent-based models that involve realistic order-matching processes for modeling continuous-time double auction markets seems to fail to be able to provide a robust link between data and many model parameters, even when these models are able to reproduce a number of well-known stylized facts of return time series. We demonstrate that while the parameters of intraday agent-based models rooted in market microstructure can be meaningfully calibrated, those exclusively related to agent behaviors and incentives remain problematic. This could simply be a failure of the calibration techniques used but we argue that the observed parameter degeneracies are most likely a consequence of the realistic matching processes employed in these models. This suggests that alternative approaches to linking data, phenomenology and market structure may be necessary and that the stylized fact-centric validation of intraday agent-based models is insufficient, and warns that increased mechanistic complexity of agent-based market models may lead to flawed insights.

Comments:	15 pages, 8 figures
Subjects:	Computational Finance (q-fin.CP); Trading and Market Microstructure (q-fin.TR)
Cite as:	arXiv:1611.08510 [q-fin.CP]
	(or arXiv:1611.08510v1 [q-fin.CP] for this version)

On regime change and hierarchical causation

60 years ago in Nov 1956, a small island economy took the first giant steps towards balanced education, health and significant reduction of local inequality, adaptively addressing economic sustainability thereafter. The Granma news cover from 1986 challenges perspectives with respect to the quantification of emergence. RIP Prof Castro. 

A transdiciplinary discourse on finance and economics

Policy dead-end: Central Banks’ continued use of DSGE Models

From Andre Breedt's Op-Ed 15/11/2016 POLITHEOR :

" ...The DSGE model has been the workhorse of central banks since the early 1980’s and has suffered from abundant and scathing critique: Olivier Blanchard argues that DSGE models are “seriously flawed” and Paul Romer – a doyen of the neo-classical economic fraternity – accuses these macroeconomic models of “attribute[ing] fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes”. ..."

... A basic proposal is to increase collaboration between the core orthodoxy of economics and ancillary fields such as econophysics, and move towards a discourse of multi or interdisciplinary coordination. ... "

http://politheor.net/policy-dead-end-central-banks-continued-use-of-dsge-models/

Towards curing tunnel vision with ABMs

http://www.bloomberg.com/news/articles/2016-11-10/haldane-says-thinking-outside-the-box-can-fix-economics



Here are some extracts from the article citing Haldane's recent remarks: 

“One of the potential failings of the economics profession is that it may have borrowed too little from other disciplines -- a methodological mono-culture,” he said in a speechon Thursday in Cambridge, England.

.....

Contrasting ABM models with traditional micro-founded economic ones, Haldane said the big picture usually looks very different from the small one.

“Aggregating from the microscopic to the macroscopic is very unlikely to give sensible insights into real world behavior, for the same reason the behavior of a single neuron is uninformative about the threat of nuclear winter.”

Bon voyage to Dieter

The 2016 team celebrated Dieter's invaluable contributions (2012-2016)  at Wits with lunch before his next research position at Oxford. Not an ending, but cheers to many more new beginnings.


Some humour: C. Rhodes is attributed to saying  "Wherever you turn your eye — except in science — an Oxford man is at the top of the tree." 

Dieter Hendricks graduated on 7 Dec 2016 and has taken up a research fellowship in UK. Missing from this pic are Mike Harvey and Fayaaz Loonat, who offered up many hours towards research and pedagogic resources in 2016 as well!
Seasons greetings and best wishes for 2017!

Humanyze tackles a cyborg startup perspective

“Imagine if all your traders were required to wear wristwatches that monitor their physiology, and you had a dashboard that tells you in real time who is freaking out.” —Andrew Lo, MIT professor of finance

http://www.bloomberg.com/news/articles/2016-09-01/wall-street-s-next-frontier-is-hacking-into-emotions-of-traders

Misscomputing culture

(is 'holism' consistent with 'humanism'?) Here is a review of some dimensions to the long-term living legacy of labour laws, not least with respect to trade and the establishment of markets: 


The invisible hands: women in Marikana
Asanda Benya
[Review of African Political Economy, Volume 42, 2015 - Issue 146]

Abstract: When we think of Marikana we think of the infamous event that took place on 16 August 2012, leading to the death of 34 striking miners. Scholarly analysis takes this further than the event to broader labour–capital relations. While useful, the examination of Marikana through this lens tends to privilege the production sphere and lends itself mainly to the exploration of the workplace; the workers, their employers and the union. In this article, the author argues that exclusive reliance on this lens is inadequate and inevitably results in many silences, one of which is the silencing of the reproduction sphere and, by extension, women. To fully understand Marikana the event, one has to understand Marikana the location, and hence realities and conditions on the ground. Such an analysis of Marikana is not only useful because it sheds light on the reproduction space, but also because it allows us to look at women who are usually ignored when talking about mines.
http://www.tandfonline.com/doi/full/10.1080/03056244.2015.1087394

Lean online?

https://www.sciencedaily.com/releases/2016/08/160816085029.htm

Cognitive offloading: How the Internet is increasingly taking over human memory

...

Summary:

Our increasing reliance on the Internet and the ease of access to the vast resource available online is affecting our thought processes for problem solving, recall and learning. In a new article, researchers have found that 'cognitive offloading', or the tendency to rely on things like the Internet as an aide-mémoire, increases after each use.

The Trouble with Mathematics and Statistics in Economics - D McCloskey History of Economic Ideas XIII (3,2005): 85-102

Extracts from the essay:

The Trouble with Mathematics and Statistics in Economics
D McCloskey  History of Economic Ideas XIII (3,2005): 85-102

http://www.deirdremccloskey.com/articles/stats/stats.php

...

"A real science, or any intelligent inquiry into the world, whether the study of earthquakes or the study of poetry, economics or physics, history or anthropology, art history or organic chemistry, a systematic inquiry into one's lover or a systematic inquiry into the Italian language, must do two things. If it only does one of them it is not an inquiry into the world. It may be good in some other way, but not in the double way that we associate with good science or other good inquiries into the world, such as a detective solving a case.

I am sure you will agree: An inquiry into the world must think and it must look. It must theorize and must observe. Formalize and record. Both. That's obvious and elementary. Not everyone involved in a collective intelligent inquiry into the world need do both: the detective can assign his dim-witted assistant to just observe. But the inquiry as a whole must reflect and must listen. Both. Of course." 

...

"So pure mathematics, pure philosophy, the pure writing of pure fictions, the pure painting of pictures, the pure composing of sonatas are all, when done well or at least interestingly, admirable activities. I have to keep saying "pure" because of course it is entirely possible—indeed commonplace for novelists, say, to take a scientific view of their subjects (Balzac, Zola, Sinclair Lewis, the post-War Italian realists, among many others are well known for their self-conscious practice of a scientific literature; Roman satire is another case; or Golden Age Dutch painting). Likewise scientists use elements of pure narration (in evolutionary biology and economic history) or elements of pure mathematics (in physics and economics) to make scientific arguments."

...

"The theorists don't have to operate in this existence-theorem way. They could instead—some do—use mathematics to develop functional forms into which the world's data can be plugged. It is the difference between abstract general equilibrium—a field of economics which practically everyone now agrees was a complete waste of time and talent—and computable general equilibrium, which has nothing whatever to do with the existence theorems and has everything to do with picking sensible numbers and simulating."

Frauden appels?

While Stiglitz may not agree with Steve Keen on the nature of debt, here he takes aim at Apple:

http://www.bloomberg.com/news/articles/2016-07-28/stiglitz-calls-apple-s-profit-reporting-in-ireland-a-fraud

[dlw]

Workshop on Financial and Actuarial Mathematics July, 11-15th, 2016 AIMS Senegal

Thank you to the local organizers  at AIMS-Senegal for bringing together a range of perspectives on risk analysis and modelling. 

AIMS-Senegal & SWMA Workshop on

Financial and Actuarial Mathematics

July, 11-15th, 2016

AIMS Senegal, Mbour, Senegal
 

The workshop will bring together established researchers, young faculty, and advanced graduate students working on Financial and Actuarial Mathematics. The workshop will also highlight the advanced and new scientific work done one those areas. This will be a first workshop organized by the Senegalese Women in mathematics association(which is  AWMA's National Chapter), in collaboration with AIMS-Senegal.  The workshop  program will include four minicourses, presentations and an afternoon students's poster presentation. 

AWMA (African Women in Mathematics Association) is an international network organizing meetings, summer schools and debating gender issues in science and education. On July 08-09th 2016, the first AWMA/West African Regional forum will also be hosted at AIMS-Senegal. 
 

Scientific Committee Diane Wilcox, Univ. Witwatersrand,  Ronnie Becker, AIMS-South Africa,  Victor Nistor, Univ.  Lorraine, France., Stéphane Girard, INRIA, France Papa Ngom, Univ. Cheikh Anta Diop de Dakar(UCAD) Idrissa Ly, Univ. Cheikh Anta Diop de Dakar(UCAD) Diaraf Seck,Univ. Cheikh Anta Diop de Dakar(UCAD) Aliou Diop, Univ. Gaston Berger de Saint Louis(UGB) Organizers Aissa Wade , Penn State et AIMS-Senegal Mouhamed M. Fall,  AIMS-Senegal Sophie Dabo, Univ. de Lille, INRIA-MODAL-SIMERGE Fagueye Ndiaye, Univ. Cheikh Anta Diop de Dakar(UCAD) Bernadette Faye, Univ. Cheikh Anta Diop de Dakar(UCAD)

Confirmed Lecturers   Diane Wilcox, Univ. Witwatersrand, Christian Francq, Univ. Lille, CREST, Paris Olivier Menoukeu Pamen, Univ. of Liverpool.  Akim Adekpedjou, Univ. of Missouri Sciences and Technology.  Confirmed Speakers Idrissa Ly, Univ. Cheikh Anta Diop de Dakar(UCAD) Diaraf Seck, Univ. Cheikh Anta Diop de Dakar(UCAD) El Hadji Déme,  Univ. Gaston Berger Saint Louis.

For more informations
Contacts:  swma.aims.workshop@gmail.com 

The Problem of Calibrating a Simple Agent-Based Model of High-Frequency Trading

Donovan Platt, Tim Gebbie

(Submitted on 5 Jun 2016)

Agent-based models, particularly those applied to financial markets, demonstrate the ability to produce realistic, simulated system dynamics, comparable to those observed in empirical investigations. Despite this, they remain fairly difficult to calibrate due to their tendency to be computationally expensive, even with recent advances in technology. For this reason, financial agent-based models are frequently validated by demonstrating an ability to reproduce well-known log return time series and central limit order book stylized facts, as opposed to being rigorously calibrated to transaction data. We thus apply an established financial agent-based model calibration framework to a simple model of high- and low-frequency trader interaction and demonstrate possible inadequacies of a stylized fact-centric approach to model validation. We further argue for the centrality of calibration to the validation of financial agent-based models and possible pitfalls of current approaches to financial agent-based modeling.

Comments:	25 pages, 11 figures
Subjects:	Computational Finance (q-fin.CP); Trading and Market Microstructure (q-fin.TR)
Cite as:	arXiv:1606.01495 [q-fin.CP]
	(or arXiv:1606.01495v1 [q-fin.CP] for this version)

Live long and think mathematically

http://www.nytimes.com/2016/04/25/opinion/the-mathematicians-90th-birthday-party.html?_r=0

Beyond inequality

Beyond inequality, this talk on Europe-in-crisis also resonates concerns from developing economies. Notably, the speakers clarifies his view as to what he considers to be fundamental signatures of the current crisis. His tax  innovations proposals are interesting and tuned for Greece. Analogously, there could innovations to address SA crisis issues which emanate from the sources where small changes in thinking and action can make a big difference in socio-economic evolutions.

Video: Yanis Varoufakis,  "And the Weak Suffer What They Must?" (Talks at Google)

Final....

Learning zero-cost portfolio selection with pattern matching

Tim Gebbie, Fayyaaz Loonat

(Submitted on 15 May 2016)

We consider and extend the adversarial agent-based learning approach of Gy{\"o}rfi {\it et al} to the situation of zero-cost portfolio selection implemented with a quadratic approximation derived from the mutual fund separation theorems. The algorithm is applied to daily sampled sequential Open-High-Low-Close data and sequential intraday 5-minute bar-data from the Johannesburg Stock Exchange (JSE). Statistical tests of the algorithms are considered. The algorithms are directly compared to standard NYSE test cases from prior literature. The learning algorithm is used to select parameters for agents (or experts) generated by pattern matching past dynamics using a simple nearest-neighbour search algorithm. It is shown that there is a speed advantage associated with using an analytic solution of the mutual fund separation theorems. It is argued that the expected loss in performance does not undermine the potential application to intraday quantitative trading and that when transactions costs and slippage are considered the strategies can still remain profitable when unleveraged. The paper demonstrates that patterns in financial time-series on the JSE can be systematically exploited in collective but that this does not imply predictability of the individual asset time-series themselves.

Comments:	28 pages, 21 figures
Subjects:	Computational Finance (q-fin.CP); Portfolio Management (q-fin.PM); Trading and Market Microstructure (q-fin.TR)
Cite as:	arXiv:1605.04600 [q-fin.CP]
	(or arXiv:1605.04600v1 [q-fin.CP] for this version)

SVAN 2016 : IMPA : Brasil : "Detecting intraday financial market states using temporal clustering": Dieter Hendricks, Tim Gebbie, Diane Wilcox

IMPA from March 28 to July 1, 2016 Rio de Janeiro (Brazil)

http://svan2016.sciencesconf.org/

http://svan2016.sciencesconf.org/conference/svan2016/pages/07b_DieterHendricks.pdf

Demonstrating the high-performance low-latency stock market simulator developed by QuERI Lab

Hawkes Models based Simulation of the JSE rules based LOB 

CoinTossX

This is the website for the interface that uses the fully re-configurable high-performance low-latency matching engine developed by Dharmesh Sing for large-scale ABM modeling. This is being used for the following working paper which is based on the testing of the infrastructure as part of the graduate research project of Mr Sing:

The simulation of a realistic market data feed using mutually-exciting Hawkes processes
 D. SING, D. HENDRICKS , and T. GEBBIE

We propose a feasible scheme for the simulation of an asynchronous stream of limit order book events.
An n-variate mutually-exciting Hawkes process is used to govern the times of coupled liquidity demand
and supply events, while trade and quote prices and volumes are generated consistent with the event
type. This provides a flexible framework to simulate a market data feed with varying throughput, with
full control over the trade and quote conditional intensities.

Keywords: market microstructure; Hawkes process; data simulation; limit order books
JEL Classification: C61, C63, D81, G10

Reflections on risk, regulation and model revision

Pricing perspectives continue to come under scrutiny in 2016. Consider the following communications by leading researchers this year on FVA:


[Hull] Models and measures 1 & 2

http://www.fincad.com/blog/models-and-measures-1 (2 Feb 2016)
"Risk-neutral valuation is without doubt the most important single principle in derivative pricing. If we did not have risk-neutral valuation, we would have to make estimates of the return provided by underlying market variables in the real world and then quantify the riskiness of the payoff in some way to determine the correct discount rate."

http://www.fincad.com/blog/models-and-measures-2 (1 Mar 2016)
"But it should always be remembered that a risk-neutral world is nothing more than an artificial construct. It does not describe how market variables behave in the real world, the world we actually live in."


[Duffie] You're doing Swaps Account wrong (11 Mar 2016)

http://www.bloomberg.com/news/articles/2016-03-11/professor-to-wall-street-you-re-doing-swaps-accounting-wrong (11 Mar  2016)
"Nitpicking over a $500,000 cost on a $100 million trade might seem inconsequential, but the market for interest-rate swaps, the largest in the world, is $319 trillion in size, according to the Bank for International Settlements. Even small errors matter."

and here is Hull on the ongoing FVA debate:
http://www.riskmindslive.com/what-is-the-fva-debate/ (26 Nov 2015)
https://www.youtube.com/watch?v=meyVxzd-Khw

DLW

Parallella

https://www.parallella.org/board/

Celebrating more than 200 years of emergent patterns

and the hidden work of Sophie Germain

from "Die Akustik" by Ernst Chladni  [image source: http://link.library.utoronto.ca/booksonline] => nothing phoolish about Fourier coefficients! Recommended reading: "From Euler, Ritz, and Galerkin to Modern Computing" By M. Gander and G. Wanner, SIAM Vol. 54, No. 4 (2012) "Images of sound" by S.Morris and L. Sharman [http://www.physics.utoronto.ca/nonlinear/preprints/idea_s02_02-morris-sharman.pdf] DLW

The death and rebirth of the stock exchange - FT.com

Good popular media article on the rapidly changing role of stock exchanges

March 9, 2016 5:58 pm, The death and rebirth of the stock exchange, John Gapper, The Financial Times.

1. " ... The best days of being a stock exchange are in the past, when they were near-monopolies owned by market-making members and could easily make money. ...",
2. “... The core business of matching buyers and sellers is not very profitable and does not have great prospects.” Being a stock exchange was fine while entry barriers were high and they could shield themselves from competition....",
3. "... If stock exchanges are so weak, why are the companies that own them so resilient? The answer is simple: [they are] not really [a] stock exchange[s] any more.".

However: "Networks remain powerful — exchanging contracts through a hub rather making a multitude of bilateral deals creates economies of scale." - until this is challenged.

No such thing as a risk-neutral market - D L Wilcox

No such thing as a risk-neutral market

Authors: D.L.Wilcox

(Submitted on 26 Feb 2016)

Abstract: A very brief history of relative valuation in neoclassical finance since 1973 is presented, with attention to core currency issues for emerging economies. Price formation is considered in the context of hierarchical causality, with discussion focussed on identifying mathematical modelling challenges for robust and transparent regulation of interactions.

Comments:	8 pages, 6 figures
Subjects:	General Finance (q-fin.GN)
Cite as:	arXiv:1602.08429 [q-fin.GN]
	(or arXiv:1602.08429v1 [q-fin.GN] for this version)

Deviations in expected price impact for small transaction volumes under fee restructuring

http://arxiv.org/abs/1602.04950

Talk by Dieter Hendricks on Adaptive Learning for Trading

Before QuERILab (2004)

RESEARCH PROBLEM STATEMENT (2004)

It is common to consider financial markets as made up of stocks which can be grouped or clustered according to similar characteristics, for example some stocks offer low returns with respect to improvement in their value but pay high dividends, while others offer small dividends but increase in value relatively quickly. The understanding of grouping characteristics is important for understanding the overall dynamics of the market in which such clustering takes place. The appearance of grouping or clustering behaviour may be due to random effects (noise) since there are bound to be overlapping properties when the number of stocks is high. Hence it is necessary to investigate methods for measuring possible noise contributions to clustering. Furthermore, grouping may change over time so that it is necessary to identify the time horizons for which clusters are stable. Is it possible to identify sectors, groups of stocks which display similar behaviour with respect to returns, and states, time periods for which the market behaves similarly, in SA financial data, by purely quantitative methods under the constraint that noise and temporal stability are understood? 

Thuthuka grant:  TTK2004072200035 (Funded from 2004)

TEAM in 2004

• DW = Diane Wilcox (applicant); 
• TG = Tim Gebbie (co-investigator);
• 1 Msc student [Project :Fourier Method for the Measurement of Univariate and Multivariate Volatility in the presence of High Frequency Data (graduated 2006)]
• 1 Internal project proposal reviewer (UCT Dept Mathematics & Applied Mathematics)
• 10 External reviewers (appointed by the NRF)

Other outputs by DW since 2004 are documented on http://www.dianewilcox.net/currresearch.htm

High-speed detection of emergent market clustering via an unsupervised parallel genetic algorithm

High-speed detection of emergent market clustering via an unsupervised parallel genetic algorithm

Type: Research Article
Authors: Dieter Hendricks  (contact author) Tim Gebbie Diane Wilcox
Issue: January/February 2016
Number of pages: 9
DOI: http://dx.doi.org/10.17159/sajs.2016/20140340
Published: 01 February 2016

Abstract:
We implement a master-slave parallel genetic algorithm with a bespoke log-likelihood fitness function to identify emergent clusters within price evolutions. We use graphics processing units (GPUs) to implement a parallel genetic algorithm and visualise the results using disjoint minimal spanning trees. We demonstrate that our GPU parallel genetic algorithm, implemented on a commercially available general purpose GPU, is able to recover stock clusters in sub-second speed, based on a subset of stocks in the South African market. This approach represents a pragmatic choice for low-cost, scalable parallel computing and is significantly faster than a prototype serial implementation in an optimised C-based fourth-generation programming language, although the results are not directly comparable because of compiler differences. Combined with fast online intraday correlation matrix estimation from high frequency data for cluster identification, the proposed implementation offers cost-effective, near-real-time risk assessment for financial practitioners.

Keywords:
unsupervised clustering; genetic algorithms; parallel algorithms; financial data processing; maximum likelihood clustering

QuERI Lab Graduate students at QMF2015

The Quantitative Methods in Finance 2015 Conference (QMF2015) : 15-18 December, Sydney. Australia

QMF 2015 Program Abstracts

QuERI Lab contributed talks:

1. Detecting Temporal Financial Market States Using Clustering  

      

Dieter Hendricks, University of the Witwatersrand, South Africa       

ABSTRACT:    We propose the application of a high‐speed maximum likelihood clustering algorithm to detect temporal  states in the financial market, using estimated correlation matrices from intraday market microstructure  features. We first determine the ex‐ante intraday temporal cluster configurations to identify financial  states. Next, temporal state features are studied to extract characteristic feature vectors. The latter serve  as low‐dimensional state descriptors which can be used efficiently in learning algorithms, enabling online  state detection for optimal planning in the high‐frequency trading domain.       

Authors: Dieter Hendricks,  Tim Gebbie,  Diane Wilcox    

When: Wednesday, 16 December 2015, 14h20 Room 3

2. Reconciling Order Book Resiliency and Price Impact          

Michael Harvey, University of the Witwatersrand, South Africa        

ABSTRACT:    Understanding and quantifying the impact and persistence of trade events on limit order book dynamics is  of critical importance for trading decisions. Specifically, the trading trajectory needs to be chosen to cause  least  impact  with  a  reasonable  guarantee  of  execution.  In  this  paper,  empirical  point  processes  are  extracted from intraday tick data which represent key liquidity demand and resiliency events. Using these  point processes, trades and quotes are modelled as a mutually‐exciting four‐variate Hawkes point process  with a sum‐of‐exponentials kernel. The calibrated model allows us to quantify order book resiliency in  terms of expected time frame and magnitude of quote replenishment in response to a trade event. We  conjecture that certain anomalous shape characteristics of empirical price impact curves can be explained  by measuring quote replenishment following trades which move the mid‐quote price. By examining a  period of increasing trade velocity on the Johannesburg Stock Exchange, we show that the empirically  observed  increase  in  low‐volume  price  impact  can  be  explained  by  a  lack  of  commensurate  quote  replenishment following low‐volume, price‐moving trades.       

Authors: Michael Harvey  Dieter Hendricks

When: Wednesday, 16 December 2015, 16h10, Room 3