Financial Intermediation at Any Scale For Quantitative Modelling

115 Pages·2016·4.58 MB·English

Financial Intermediation at Any Scale
For Quantitative Modelling (3/3)
CoursBachelier
Charles-Albert Lehalle
CapitalFundManagement,ParisandImperialCollege,London
IHP,November18,2016toDecember4,2016
CALehalle(CoursBachelier,2016) 1/85
Motivation
Whataboutthetopic“IntermediationonFinancialMarkets”
(cid:73) Sincethe2008-2009crisislegislators’andregulators’viewpointonfinancialmarketschanged,
(cid:73) Theytargettomonitorandlimittherisktakenbythemarketparticipants,
(cid:73) Inonesentence:theywanttoensuremostparticipantsplaysaroleof intermediaries,andnothingmore.
(cid:73) Thenotionofintermediationandtheroleofbanks,investmentbanks,dealers,brokers,andnowinsurance
companiesandfundshaveevolvedandcontinuetoevolve;
(cid:73) importantconceptstounderstandthisare:microstructureandinfrastructure;theyarelinkedto
liquidity.
(cid:73) Theselast10years,thefieldofMarketMicrostructureemerged.Relatedliteraturehasgrown...
(cid:73) Iamconvinced financialmathematics canaddressquiteefficientlycoreconcepts,aspartlyanacademic
andpartlyaprofessional,Idedicatedthelast12yearstounderstandthesechangesfromapracticalanda
theoreticalviewpoint.
(cid:73) Thesesessionswillbetheoccasiontosharehow,inmyopinion,financialmathematicscananswertonew
andimportantquestionsraisedbyrecentchanges.
CALehalle(CoursBachelier,2016) 2/85
The Standard Pitch
(WeWillGoFurtherThanThis)
Followingthe2008crisis,thefinancialsystemchangedalot:
(cid:73) “Clients”(frominsideoroutside)havenomoreappetiteforsophisticatedproducts.
⇒ Thesystemwentfromabespokemarkettoamassmarket.
Bespoke meanstosellproductsthatareverydifferent:noeconomiesofscalebuthighmargins.
Massmarket meansalotofsimilarproducts+optimizedlogistics.
(cid:73) Regulatorswelcomethischangebecauseitcanpreventanaccumulationofriskininventories(cf.optimized
logistics).
⇒ TheG20ofPittsburgh(Sept.2009)puttheemphasison inventorycontrol (itistherootofimproved
clearing,segregatedrisklimits,etc).
⇒ Policymakerstookprofitoftwoexistingregulations(RegNMSintheUSandMiFIDinEurope)topush
toward electronification ofexchanges(i.e.improvedtraceabilityandlessinformationasymmetry).
(cid:73) Technologywentintothegame.Thinkaboutthekindofrecent“innovations”(uber,booking.com,M-pesa,
blockchain,etc):itisabout disintermediation.
⇒ Howdoyoudesintermediateasystemmadeofintermediates?
CALehalle(CoursBachelier,2016) 3/85
Market Microstructure?
Historically,marketmicrostructurestandsfornotreducing
(cid:73) Sellers=EquitySharesandBondsissuers
(cid:73) Buyers=investors.
Inpractice,today,associatedtopicsare
(cid:73) Marketimpact,FiresalesandFlashCrashes
(cid:73) Auction/Matchingmechanisms(LimitOrderbooks,RFQ,conditional/fuzzymatching,etc)
(cid:73) Optimaltrading/Liquidation
(cid:73) MarketMakingandHighFrequencyTrading
(cid:73) Investmentprocesswhiletakingallthisintoaccount
CALehalle(CoursBachelier,2016) 4/85
My Viewpoint on Market Microstructure
IhavebeenGlobalHeadofQuantitativeResearchatCréditAgricoleCheuvreuxandCIBduringyears(including
thecrisis).Idiscussalotwithregulators;previouslyinsidethe workinggrouponFinancialInnovation ofthe
ESMA,nowinsidethe ScientificCommittee oftheAMF.IamnowinalargeHedgeFund.
(cid:73) FromaFinancial
Mathematics
perspective,itis
nothingmorethan
addingavariableto
ourmodels:the
Liquidity.
(cid:73) Theinteractions
betweenliquidityand
other(usual)variables
isfarfromtrivial.
Disclaimer:Iexpressmy
ownopinionandnottheone
ofanyoftheseinstitutions.
CALehalle(CoursBachelier,2016) 5/85
What Will We Do During 3 Lectures + 1 Seminar?
Iwillnotgointhedetailsofthemodels(exceptforfewofthem),becauseItargettogiveyouenoughinformation
toincludeliquidityinthemodelsyouknowbetterthanme.
Hence,Iwill
(cid:43) 18Nov:
(cid:73) Startbythedefinitionofintermediation
(cid:73) FocusonthetwomainLiquidityvariablesonfinancialmarket:inventoriesandflows
(cid:43) 25Nov:
(cid:73) ShowyouwhatLiquiditylookslikewhenwecanobserveit
(cid:43) 2Dec:
(cid:73) Underlinewhymarketmaking(inventorykeeping)andoptimaltrading(flowmanagement)arecoreforthe
newroleofmarketparticipants.
(cid:43) 2Dec[Seminar]:
(cid:73) Explainwhatpractitionersaredoing.
Itisanon-goingwork
CALehalle(CoursBachelier,2016) 6/85
Advertisement For Optimal Trading
OptimalTradingisAboutToCloseTheloop
Myownviewpointonoptimaltrading:
(cid:73) Wehavesophisticated(buttractable)methodsto optimizethestrategyofoneagent (investmentbank,
trader,assetmanager,etc)facinga“backgroundnoise”(stochasticcontrolisnowreallymature),
(cid:73) Thesemethodsare usedbypractitioners (alreadythreebooksonthistopic[Lehalleetal.,2013],
[Carteaetal.,2015],[Guéant,2016]),
(cid:73) Differentialgames,andmorespecifically meanfieldgames nowproposeverypromisingframeworksto
replacemostofthebackgroundnoisebyameanfieldofexplicitlymodelledagents:
(cid:73) toproviderobustresultsforpractitioners[CardaliaguetandLehalle,2016],
(cid:73) toobtainmeaningfulresultsforpolicyrecommandations[Lachapelleetal.,2016].
Uptonowmostresultsonglobalmodellingusedasimplificationofareality.Nowdecisionsaremodelledand
systematic,whynotinjectthemintoaglobalmodel?
Itshouldenableyoutoproduceveryaccuratemodelsanddrawpowerfulconclusions.
(cid:73) Beyondoptimaltrading,theselecturesshouldhelpyouinintroducingliquidityinanymodelofyours:please
askquestion!
CALehalle(CoursBachelier,2016) 7/85
Outline of the Sessions
1 TheFinancialSystemasaNetworkofIntermediaries
2 StylizedFactsonLiquidity
3 OptimalTrading
4 Conclusion
5 ClosingTheLoop
CALehalle(CoursBachelier,2016) 8/85
Outline
1 TheFinancialSystemasaNetworkofIntermediaries
RisksTransformationasThePrimaryRoleofTheFinancialSystem
2 StylizedFactsonLiquidity
3 OptimalTrading
LearningbyTrading(inTheDark)
TradingBenchmarks
OptimalTradingRate
OptimalTradingAgainstPermanentImpact:stylizedfacts
OptimalControlofTradingRobots
4 Conclusion
5 ClosingTheLoop
MFGofControls
Kyle’sModel
CALehalle(CoursBachelier,2016) 8/85
Outline
1 TheFinancialSystemasaNetworkofIntermediaries
RisksTransformationasThePrimaryRoleofTheFinancialSystem
2 StylizedFactsonLiquidity
3 OptimalTrading
LearningbyTrading(inTheDark)
TradingBenchmarks
OptimalTradingRate
OptimalTradingAgainstPermanentImpact:stylizedfacts
OptimalControlofTradingRobots
4 Conclusion
5 ClosingTheLoop
MFGofControls
Kyle’sModel
CALehalle(CoursBachelier,2016) 8/85