Assistant Professor of Finance
Carl H. Lindner College of Business
University of Cincinnati
408 Lindner Hall
Cincinnati, OH 45221
NBER Working Papers and Publications
|January 2018||Liquidity Regimes and Optimal Dynamic Asset Allocation|
with Pierre Collin-Dufresne, Kent D. Daniel: w24222
We solve for the optimal dynamic asset allocation when expected returns, volatilities, and trading costs follow a regime switching model. The optimal policy is to trade partially towards an aim portfolio with a given trading speed. In a given state, the aim portfolio is a weighted average of mean-variance portfolios in every state, where the weight is a function of the probability of transitioning to that state, and the state’s persistence, risk and trading costs. The trading speed is higher in states that are more persistent, where return volatility is higher and trading costs are lower. It can be optimal to deviate substantially from the mean-variance efficient portfolio (or from the risk-parity allocation) and to underweight high Sharpe ratio (high volatility) assets, as well as to trad...
|October 2013||High Frequency Traders: Taking Advantage of Speed|
with Yacine Aït-Sahalia: w19531
We propose a model of dynamic trading where a strategic high frequency trader receives an imperfect signal about future order flows, and exploits his speed advantage to optimize his quoting policy. We determine the provision of liquidity, order cancellations, and impact on low frequency traders as a function of both the high frequency trader's latency, and the market volatility. The model predicts that volatility leads high frequency traders to reduce their provision of liquidity. Finally, we analyze the impact of various policies designed to potentially regulate high frequency trading.