This paper rationalizes the LASSO algorithm based on uncertain fat-tail priors and max-min robust optimization. Our rationalization excludes heuristic learning or restrictive prior assumptions in the original interpretation of LASSO (Tibshirani (1996)). In our setting, economic agents...

This work uses financial markets connected by arbitrage relations to investigate the dynamics of price and liquidity discovery, which refer to the cross-instrument forecasting power for prices and liquidity, respectively. Specifically, we seek to understand the linkage between the cheapest to...