This paper derives an analytic expression for the distribution of the average volatility $\frac{1}{T-t} \int_t^T \sigma_s^2 ds$ in the stochastic volatility model of Hull and White. This result answers a longstanding question, posed by Hull and White (Journal of Finance 42, 1987), whether such...

This paper studies the role of strategy and the order book market mechanism in price dynamics and the order flow behaviour. To this end we analyse a zero-intelligence agent model of a dynamic limit order market. Stylised facts of limit order markets are shown to be influenced and, in some cases,...

This paper introduces an expected value estimator with expert knowledge to the robust estimation of sovereign rating transitions which are characterised by few observations. Our estimates of default premia within Mexican, Colombian and Brazilian Eurobond yield spreads provide a better fit than...

Modern portfolio theory regards the return of an asset as its upside, while volatility is seen as its downside. This view is shared by the majority of investors who dislike volatile markets. Recent results in financial mathematics, however, show that volatility is actually good, rather than bad,...

In this paper the performance of locally risk-minimizing hedge strategies for European options in stochastic volatility models is studied from an experimental as well as from an empirical perspective. These hedge strategies are derived for a large class of diffusion-type stochastic volatility...

This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term...

The paper examines a dynamic model of a financial market with endogenous asset prices determined by short run equilibrium of supply and demand. Assets pay dividends that are partially consumed and partially reinvested. The traders use fixed-mix investment strategies (portfolio rules),...

This paper deals with the deterministic and stochastic versions of the von Neumann-Gale model. Von Neumann's (1937) original concern was to determine a balanced path growing at a maximal rate for a linear and stationary technology and a price system supporting that path.Such a pair (a path and a...

In this paper we analyze the long-run dynamics of the market selection process among simple trading strategies in an incomplete asset market with endogenous prices. We identify a unique surviving financial trading strategy. Investors following this strategy asymptotically gather total market...