By Olivier Gueant

This ebook is without doubt one of the first to provide the mathematical types most typically used to unravel optimum execution difficulties and industry making difficulties in finance. The monetary arithmetic of marketplace Liquidity: From optimum Execution to marketplace Making provides a common modeling framework for optimum execution problems–inspired from the Almgren-Chriss approach–and then demonstrates using that framework throughout quite a lot of areas.

The e-book introduces the classical instruments of optimum execution and marketplace making, besides their useful use. It additionally demonstrates how the instruments utilized in the optimum execution literature can be utilized to resolve classical and new concerns the place accounting for liquidity is necessary. particularly, it provides state of the art examine at the pricing of block trades, the pricing and hedging of techniques while liquidity concerns, and the administration of complicated percentage buy-back contracts.

What units this e-book except others is that it makes a speciality of particular issues which are infrequently, or in basic terms in brief, tackled in books facing marketplace microstructure. It is going a long way past present books by way of mathematical modeling–bridging the space among optimum execution and different fields of Quantitative Finance.

The publication comprises appendices devoted to the mathematical notions used in the course of the ebook. Appendix A recollects classical techniques of mathematical economics. Appendix B remembers classical instruments of convex research and optimization, besides principal rules and result of the calculus of variations.

This self-contained publication is out there to somebody with a minimum historical past in mathematical research, dynamic optimization, and stochastic calculus. overlaying post-electronification monetary markets and liquidity concerns for pricing, this ebook is a perfect source to assist funding banks and asset managers optimize buying and selling techniques and enhance total danger management.

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Sample text

Although the consolidation wave seems to be over, some new regulations, especially MiFID 2, will soon change the trading environment again. 11 As always, our focus will be on Europe, although we sometimes speak about other regions to highlight some specificities. An important consequence of MiFID is that liquidity, for a given stock, is fragmented over several venues. Among these venues, there is the historical exchange of the stock, often called the main or primary venue. It is a Regulated Market (RM) in the MiFID terminology.

However, credit derivatives books could not simply be managed as equity derivatives books or fixed income derivatives books. In particular, the famous copula model of Li [131], often used in practice with the calibrated “base correlations” to price and hedge Collateralized Debt Obligations (CDOs), should not have been used so blindly. The 2007–2008 crisis has highlighted the danger of the risk-neutral pricing/hedging models when used in highly incomplete markets. It has also highlighted the importance of model risk: when practitioners believe, without any evidence, that most of the risk is captured by their models, they already have one foot in the grave.

2 The Financial Mathematics of Market Liquidity Optimal execution and market making in the extended market microstructure literature The topics addressed in this book are recent topics for the community of mathematicians involved in Quantitative Finance. However, they are related to some old topics addressed by the economists who have participated (mainly since the 1980s) to the emergence of an important literature on market microstructure. 1 The classical literature on market microstructure In the traditional classification of economists, market microstructure constitutes an area of finance concerned with the price formation process of financial assets, and the influence of the market structure on this process.

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