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de Finetti Risk Seminars / Erhan Bayraktar 17 maggio 2017


Mercoledì 17 maggio 2017 alle ore 18.00 in Sala di Rappresentanza del

Dipartimento di Matematica in Via C. Saldini 50 Milano

si terrà il de Finetti Risk Seminars:

Erhan Bayraktar (University of Michigan)



Why do mini-flash crashes occur? Human errors, endogenous feedback loops, the
nature of modern liquidity provision, fundamental value shocks, and market fragmentation are often
implicated. We develop a model which unifies aspects of the first three explanations. Our setup seems
to reproduce a number of features of recent mini-flash crashes. For example, there are circumstances
in which mini-flash crashes will not occur. When they do, even just before their onset, market
participants may not know with certainty whether there will be a crash or spike or that such an event is
imminent at all. We appear to observe mini-flash crashes can happen in both low and high trading
volume regimes as well. To the best of our knowledge, we also introduce a new paradigm for studying
model misspecification risks in an optimal trading context. Our approach is based on making an explicit
distinction between reality and our agents’ models for reality. More precisely, each agent’s model for
how a certain risky asset’s price will evolve is wrong in two ways: His understanding of how the price
would move in his absence and how his actions affect prices are both imperfect. In fact, aside from a
single trivial case, none of our agents ever know the correct price dynamics. We highlight how this
framework differs from other common methods for addressing trading model misspecification risks
including position limits, sensitivity analysis, Bayesian model averaging, the worst-case framework, and
interpolations between the worst-case and classical setups.


15 maggio 2017
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