Decisions on ass et allocations are often determined by covariance estimates from historical market data. In this paper, we introduce a wavelet-based portfolio algorithm, distinguishing between newly embedded news and long-run information that has already been fully absorbed by the market....

We introduce a financial network approach to quantify the impact of counterparty risk on firms' daily market risk, measured via conditional volatility. Translating conditional volatility into a value-at-risk (VaR) framework allows us to identify extreme losses beyond an estimated loss limit and...

We consider a financial network where banks are heterogeneous in scales and each bank has only local knowledge regarding the network. Each bank must make counterparty and portfolio decisions while facing uncertainty regarding the network structure. Such uncertainty plays an important role in...

We develop a new framework to characterize the dynamics of triangular (three-point) arbitrage in electronic foreign exchange markets. To examine the properties of arbitrage, we propose a wavelet-based regression approach that is robust to estimation errors, measurement bias and persistence....

Do all investor types contribute equally to volatility formation? Although stock volatility should ideally originate only from fundamental innovations, it is embedded into prices through the trading process. We compare the relative contributions of trading by local institutions, local...

The asset allocation decision often relies upon correlation estimates arising from short-run data. Short-run correlation estimates may, however, be distorted by frictions. In this paper, we introduce a long-run wavelet-based correlation estimator, distinguishing between long-run common behavior...

This paper examines changes in market quality resulting from the smaller tick size of the interbank foreign exchange market. Coupled with the lower tick size, the special composition of traders and their order placement strategies created a suitable environment for high- frequency traders...

This paper presents an empirical investigation of scaling and multifractal properties of US Dollar–Deutschemark (USD–DEM) returns. The data set is ten years of 5-min returns. The cumulative return distributions of positive and negative tails at different time intervals are linear in the...