Modeling Stock Order Flows and Learning Market-Making from Data

Stock markets employ specialized traders, market-makers, designed to provide liquidity and volume to the market by constantly supplying both supply and demand. In this paper, we demonstrate a novel method for modeling the market as a dynamic system and a reinforcement learning algorithm that learns profitable market-making strategies when run on this model. The sequence of buys and sells for a particular stock, the order flow, we model as an Input-Output Hidden Markov Model fit to historical data. When combined with the dynamics of the order book, this creates a highly non-linear and difficult dynamic system. Our reinforcement learning algorithm, based on likelihood ratios, is run on this partially-observable environment. We demonstrate learning results for two separate real stocks.

Apatite-Polymer Composite Particles for Controlled Delivery of BMP-2: In Vitro Release and Cellular Response

Bone morphogenetic protein-2 (BMP-2) has the ability to induce osteoblast differentiation of undifferentiated cells, resulting in the healing of skeletal defects when delivered with a suitable carrier. We have applied a versatile delivery platform comprising a novel composite of two biomaterials with proven track records – apatite and poly(lactic-co-glycolic acid) (PLGA) – to the delivery of BMP-2. Sustained release of this growth factor was tuned with variables that affect polymer degradation and/or apatite dissolution, such as polymer molecular weight, polymer composition, apatite loading, and apatite particle size. The effect of released BMP-2 on C3H10T1/2 murine pluripotent mesenchymal cells was assessed by tracking the expression of osteoblastic makers, alkaline phosphatase (ALP) and osteocalcin. Release media collected over 100 days induced elevated ALP activity in C3H10T1/2 cells. The expression of osteocalcin was also upregulated significantly. These results demonstrated the potential of apatite-PLGA composite particles for releasing protein in bioactive form over extended periods of time.

Risk Aversion in Inventory Management

Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution.

Whither Japan's Economy?

The Japanese economy entered a long recession in spring 1997. Its economic growth has been much lower than in the US and the EU despite large fiscal stimulus packages, a monetary policy which has brought interest rates to zero since 1999, injections of public money to recapitalize banks, and programs of liberalization and deregulation. How could all these policies have failed to bring the Japanese economy back on a sustainable growth path? This paper argues that the failure of Japan's efforts to restore a sound economic environment is the result of having deliberately chosen inappropriate and inadequate monetary and fiscal instruments to tackle the macroeconomic and structural problems that have burdened the Japanese economy since the burst of the financial bubble at the beginning of the 90s. These choices were deliberate, since the "right" policies (in primis the resolution of the banking crisis) presented unbearable political costs, not only for the ruling parties, but also for the bureaucratic and business elites. The misfortunes of the Japanese economy during the long recession not only allow us to draw important economic policy lessons, but also stimulate reflections on the disruptive role on economic policies caused by powerful vested interests when an economy needs broad and deep structural changes. The final part of the paper focuses on ways to tackle Japan's banking crisis. In particular, it explores the Scandinavian solution, which, mutatis mutandis, might serve Japanese policy-makers well.