Financial Math seminar: Prof. Davide Pirino
"ZEROS" November 27, 1.00 pm, room A (1st floor, Bldg B)
Wednesday, November 27, 2019
Abstract
Asset prices can be stale. We define price “staleness” as lack of price adjustments yielding zero returns (i.e., zeros). The term “idleness” (resp. “near idleness”) is, instead, used to define staleness when trading activity is absent (resp. close to absent). Using statistical and pricing metrics, we show that zeros are a genuine economic phenomenon linked to the dynamics of trading volume and, therefore, liquidity. Zeros are, in general, not the result of institutional features, like price discreteness. In essence, spells of idleness or near idleness are stylized facts suggestive of a key, omitted market friction in the modeling of asset prices. We illustrate how accounting for this friction may generate sizable risk compensations in short-dated option returns.
Joint work with Federico M. Bandi, Aleksey Kolokolov, Roberto Renò.