This paper presents a quantitative model of financial transactions between economic agents on economic space. Risk ratings of economic agents play role of their coordinates. Aggregate amounts of agent's financial variables at point x define macro financial variables as functions of time and...

Investors typically measure an asset’s potential to diversify a portfolio by its correlations with the portfolio’s other assets, but correlation is useful only if it provides a good estimate of how an asset’s returns co-occur cumulatively with the other asset returns over the investor’s...

In this paper, a continuous-time, structural model of a dealer-bank is presented to derive fair value equations for credit-risky financial products that are not perfectly hedged. The impact these contracts have on the dealer-bank's earnings volatility, and consequently, their solvency and...

We give a simple explicit formula for turnover reduction when a large number of alphas are traded on the same execution platform and trades are crossed internally. We model turnover reduction via alpha correlations. Then, for a large number of alphas, turnover reduction is related to the largest...

We propose that investment strategies should be evaluated based on their net-of-trading-cost return for each level of risk, which we term the "implementable efficient frontier." While numerous studies use machine learning return forecasts to generate portfolios, their agnosticism toward trading...

Classical quantitative finance models such as the Geometric Brownian Motion or its later extensions such as local or stochastic volatility models do not make sense when seen from a physics-based perspective, as they are all equivalent to a negative mass oscillator with a noise. This paper...

We investigate the optimal investment problem when the interest rate is stochastic and the investor must pay proportional transaction costs when buying and selling the risky assets. We first consider a portfolio of bonds and transaction costs.We then add a stock to the portfolio, and analyze the...

The effective transaction cost rates (TCRs) facing large institutional investors often depend on their trading speeds. We propose a continuous time work-horse model to study optimal trading strategies with speed-dependent TCRs. Unlike the existing literature, our model allows the TCRs to be a...