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ORIE Colloquium: Paul Glasserman (Columbia) - Information-Driven Price and Volatility Cycles

Tuesday, November 13, 2018 at 4:15pm

Frank H. T. Rhodes Hall, 253

Information-Driven Price and Volatility Cycles

How do small shocks get amplified into market crashes? We propose and analyze a dynamic model in which stock market prices and volatility shift between higher and lower levels based on changes in the information available to investors about future dividends. The model evolves through overlapping generations. In each generation, investors decide whether to acquire information at a cost. The precision of available information is subject to exogenous shocks; in addition, more information becomes available as more investors choose to become informed. The model gives rise to multiple fixed points for the fraction of informed investors, corresponding to different price and volatility regimes. Investors rationally anticipate potential transitions between regimes. We calibrate the model to historical data and find that the transitions can generate large price drops accompanied by large increases in volatility. This pattern may play a role in the onset of a financial crisis and in responses to changes in information disclosure. The model isolates the role of information dynamics in producing these effects.

This is joint work with Harry Mamaysky and Yiwen Shen.

Paul Glasserman is the Jack R. Anderson Professor of Business at Columbia Business School. In 2011-2012, he was on leave from Columbia and working at the Office of Financial Research in the U.S. Treasury Department, where he continues to serve as a part-time consultant on financial stability research. He also chairs the Financial and Business Analytics Center in Columbia's Data Science Institute. Paul's research interests include quantitative finance and other applications of stochastic models. His publications include the book Monte Carlo Methods in Financial Engineering, which received the 2006 Lanchester Prize and the 2005 I-Sim Outstanding Publication Award. Paul is also a past recipient of the Erlang Prize in Applied Probability and Risk Magazine's Quant of the Year Award.

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College of Engineering, Operations Research and Information Engineering


engineering, operations research, orie, College of Engineering





Paul Glasserman

Speaker Affiliation

Columbia Business School

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