Ravi Kashyap | City University of Hong Kong (original) (raw)

Papers by Ravi Kashyap

Journal of Investing, 2024

We point out the primary riddle of risk management, which is that the life of a risk manager is v... more We point out the primary riddle of risk management, which is that the life of a risk manager is very similar to someone doing a slow walk on a tight rope. We provide a set of directives, the five pillars risk mitigation guidelines, aimed at brevity so that it is readily apparent what actions to perform, and implement, without much confusion. The guidelines provided are based on our experience on trading desks across many different asset classes, and they are particularly applicable for the burgeoning field of crypto risk management. It is generally a troubling scenario wherein someone tries to manage something that they do not fully understand. Risk, as we know it, requires a lot more in-depth studies to be performed before we are in a position to more fully appreciate the etiology of risk. Once that starts to happen, we will be in a better place to try and manage risk more thoroughly. Our present attempts are better referred to as risk mitigation.

Finance Research Letters, 2023

We consider the problem of being a cross-chain wealth management platform with deposits, redempti... more We consider the problem of being a cross-chain wealth management platform with deposits, redemptions and investment assets across multiple networks. We discuss the need for blockchain bridges to facilitates fund flows across platforms. We point out several issues with existing bridges. We develop an algorithm - tailored to overcome current constraints - that dynamically changes the utilization of bridge capacities and hence the amounts to be transferred across networks. We illustrate several scenarios using numerical simulations.

Annals of Operations Research, 2022

Models to price long term loans in the securities lending business are developed. These longer ho... more Models to price long term loans in the securities lending business are developed. These longer horizon deals can be viewed as contracts with optionality embedded in them. This insight leads to the usage of established methods from derivatives theory to price such contracts. Numerical simulations are used to demonstrate the practical applicability of these models. The techniques advanced here can lead to greater synergies between the management of derivative and delta-one trading desks, perhaps even being able to combine certain aspects of the day to day operations of these seemingly disparate entities. These models are part of one of the least explored, yet profit laden, areas of modern management.

A heuristic is developed to mitigate any loss of information, which might set in when parameters are estimated first and then the valuations are performed, by directly calculating valuations using the historical time series. This approach to valuations can lead to reduced models errors, robust estimation systems, greater financial stability and economic strength. An illustration is provided regarding how the methodologies developed here could be useful for inventory management, emissions trading and insurance risk mitigation. All these techniques could have applications for dealing with other financial instruments, non-financial commodities and many forms of uncertainty.

Statistica Sinica, 2022

We provide a justification for why, and when, endogeneity will not cause bias in the interpretati... more We provide a justification for why, and when, endogeneity will not cause bias in the interpretation of the coefficients in a regression model. This technique can be a viable alternative to, or even used alongside, the instrumental variable method. We show that when performing any comparative study, it is possible to measure the true change in the coefficients under a broad set of conditions. Our results hold, as long as the product of the covariance structure between the explanatory variables and the covariance between the error term and the explanatory variables are equal, within the same system at different time periods or across multiple systems at the same point in time.

Journal for Multicultural Education, 2021

शिशुर्वेत्ति पशुर्वेत्ति वेत्ति गानरसं फणी । साहित्यरसमाधुर्यं शङ्करो वेत्ति वा न वा || ś... more शिशुर्वेत्ति पशुर्वेत्ति वेत्ति गानरसं फणी ।

साहित्यरसमाधुर्यं शङ्करो वेत्ति वा न वा ||

śiśurvetti paśurvetti vetti gānarasaṁ phaṇī |

sāhityarasamādhuryaṁ śaṅkaro vetti vā na vā ||

The ultimate sweetness of music is understood and enjoyed even by an infant, even by an animal and even by a snake.

Indeed, we do not know whether the erudite scholar can really enjoy the sweetness of the nectar of literature, musical lyrics and the arts.

The popular belief in the scientific community is that, “Mathematics is the best way of expressing the universe ...”. But perhaps there is another contender, a stronger one in fact, and that might be music. We discuss how music, across cultures and time, has been the constant message of hope and happiness. Possibly, music is present in our very genetic codes giving us an innate sense of rhythm and endowing the capacity for appreciation even to newborns. We show using simple logic (isn't logic a gift from the domain of mathematics?) that one day, once we understand both mathematics and music better, we might see both of them as the same language. Until then perhaps, we should consider supplementing mathematics with music, or even replacing it if necessary, depending on the extent of comprehension in the audience. The educational (and policy) implications are to ensure that the future creators of knowledge are equally adept at both music and mathematics. This dual capability would enable researchers to encode their findings in such a way that it can be appreciated by an audience larger than the following we presently have for the mathematical transmission of knowledge.

Accounting and Finance, 2021

We consider in detail an investment strategy, titled “The Bounce Basket”, designed for someone to... more We consider in detail an investment strategy, titled “The Bounce Basket”, designed for someone to express a bullish view on the market by allowing them to take long positions on securities that would benefit the most from a rally in the markets. We demonstrate the use of quantitative metrics and large amounts of historical data towards decision making goals. This investment concept combines macroeconomic views with characteristics of individual securities to beat the market returns. The central idea of this theme is to identity securities from a regional perspective that are heavily shorted and yet are fundamentally sound with at least a minimum buy rating from a consensus of stock analysts covering the securities. We discuss the components of creating such a strategy including the mechanics of constructing the portfolio. Using simulations, in which securities lending data is modeled as geometric brownian motions, we provide a few flavors of creating a ranking of securities to identity the ones that are heavily shorted.

An investment strategy of this kind will be ideal in market scenarios when a downturn happens due to unexpected extreme events and the markets are anticipated to bounce back thereafter. This situation is especially applicable to incidents being observed, and relevant proceedings, during the Coronavirus pandemic in 2020-2021. This strategy is one particular way to overcome a potential behavioral bias related to investing, which we term the “rebound effect”.

World Futures, 2021

We discuss preliminary results from two experiments and put forth the notion that the development... more We discuss preliminary results from two experiments and put forth the notion that the development of sensory systems might be more geared towards discerning differences rather than for spotting similarities. We present the possibility that the necessity to spot differences might have evolved to ensure the survival of the organism, which suggests numerous other experiments to assess the response of participants to various stimuli. We consider our present state of affairs, wherein the need is to thrive and not merely survive, which requires us to spot similarities around us. We provide some suggestions on how this attribute can be developed, which includes mathematical education. We conclude with an alternate measure for intelligence, termed the Involvement Quotient (also, IQ), which gauges the level of involvement of the sense organs to whatever is happening around the individual.

Technological Forecasting & Social Change, 2021

We discuss the objectives of any endeavor in creating artificial intelligence, AI, and provide a ... more We discuss the objectives of any endeavor in creating artificial intelligence, AI, and provide a possible alternative. Intelligence might be an unintended consequence of curiosity left to roam free, best exemplified by a frolicking infant. This suggests that our attempts at AI could have been misguided. What we actually need to strive for can be termed artificial curiosity, AC, and intelligence happens as a consequence of those efforts. For this unintentional yet welcome aftereffect to set in a foundational list of guiding principles needs to be present. We start with the intuition for this line of reasoning and formalize it with a series of definitions, assumptions, ingredients, models and iterative improvements that will be necessary to make the incubation of intelligence a reality. Our discussion provides conceptual modifications to the Turing Test and to Searle’s Chinese room argument. We discuss the future implications for society as AI becomes an integral part of life.

We provide a road-map for creating intelligence with the technical parts relegated to the appendix so that the article is accessible to a wide audience. The central techniques in our formal approach to creating intelligence draw upon tools and concepts widely used in physics, cognitive science, psychology, evolutionary biology, statistics, linguistics, communication systems, pattern recognition, marketing, economics, finance, information science and computational theory highlighting that solutions for creating artificial intelligence have to transcend the artificial barriers between various fields and be highly multi-disciplinary.

Some of the topics we discuss are:

• The Benchmark for Brainpower
o Intelligence for What Sake
o Minds versus Machines
o Becoming Smarter than Albert Einstein!
• A Journey to the Land of Unintended Consequences
o I Don’t Know, A Great Answer
o Acing the Turing Test
o Mexican Chihuahua solving Korean Puzzles under a Mush-Room
o Merry-Go-Round of Trials, Errors and Revisions
o Gifts from the Realm of the Unintentional
o A Road map for Intelligence
• From Words to Symbols, A Curious and Confident Model of Intellect

Physica A: Statistical Mechanics and its Applications, 2020

To trade, or not to trade, that is the question! Whether an optimizer can yield the answer, ... more To trade, or not to trade, that is the question!

Whether an optimizer can yield the answer,

Against the spikes and crashes of markets gone wild.

To quench one’s thirst before liquidity runs dry,

Or wait till the tide of momentum turns mild.

We develop a fundamentally different stochastic dynamic programming model of trading costs. Built on a strong theoretical foundation, our model provides insights to market participants by splitting the overall move of the security price during the duration of an order into the Market Impact (price move caused by their actions) and Market Timing (price move caused by everyone else) components. We derive formulations of this model under different laws of motion of the security prices, starting with a simple benchmark scenario and extending this to include multiple sources of uncertainty, liquidity constraints due to volume curve shifts and relating trading costs to the spread.

We develop a numerical framework that can be used to obtain optimal executions under any law of motion of prices and demonstrate the tremendous practical applicability of our theoretical methodology including the powerful numerical techniques to implement them. Our decomposition of trading costs into Market Impact and Market Timing allows us to deduce the zero sum game nature of trading costs. It holds numerous lessons for dealing with complex systems, wherein reducing the complexity by splitting the many sources of uncertainty can lead to better insights in the decision process.

B.E. Journal of Economic Analysis & Policy, Mar 3, 2020

We formulate one methodology to put a value or price on knowledge using well accepted techniques ... more We formulate one methodology to put a value or price on knowledge using well accepted techniques from finance. We provide justifications for these finance principles based on the limitations of the physical world we live in. We start with the intuition for our method to value knowledge and then formalize this idea with a series of axioms and models. To the best of our knowledge this is the first recorded attempt to put a numerical value on knowledge. The implications of this valuation exercise, which places a high premium on any piece of knowledge, are to ensure that participants in any knowledge system are better trained to notice the knowledge available from any source. Just because someone does not see a connection does not mean that there is no connection. We need to try harder and be more open to acknowledging the smallest piece of new knowledge that might have been brought to light by anyone from anywhere about anything.

Physica A: Statistical Mechanics and its Applications, 2019

We develop a novel methodology based on the marriage between the Bhattacharyya distance, a measur... more We develop a novel methodology based on the marriage between the Bhattacharyya distance, a measure of similarity across distributions of random variables, and the Johnson-Lindenstrauss Lemma, a technique for dimension reduction. The resulting technique is a simple yet powerful tool that allows comparisons between data-sets representing any two distributions. The degree to which different entities, (markets, universities, hospitals, cities, groups of securities, etc.), have different distance measures of their corresponding distributions tells us the extent to which they are different, aiding participants looking for diversification or looking for more of the same thing. We demonstrate a relationship between covariance and distance measures based on a generic extension of Stein’s Lemma. We consider an asset pricing application and then briefly discuss how this methodology lends itself to numerous market-structure studies and even applications outside the realm of finance / social sciences by illustrating a biological application. We provide numerical illustrations using security prices, volumes and volatilities of both these variables from six different countries.

Journal of Private Equity, 2019

We take a closer look at the life and legacy of Micheal Milken. We discuss why Michael Milken, al... more We take a closer look at the life and legacy of Micheal Milken. We discuss why Michael Milken, also know as the Junk Bond King, was not just any other King or run-of-the-mill Junk Dealer, but ”The Junk Dealer”. We find parallels between the three parts to any magic act and what Micheal Milken did, showing that his accomplishments were nothing short of a miracle. His compensation at that time captures to a certain extent the magnitude of the changes he brought about, the eco-system he created for businesses to flourish, the impact he had on the wider economy and also on the future growth and development of American Industry. We emphasize two of his contributions to the financial industry that have grown in importance over the years. One was the impetus given to the Private Equity industry and the use of LBOs. The second was the realization that thorough research was the key to success, financial and otherwise. Perhaps an unintended consequence of the growth in junk bonds and tailored financing was the growth of Silicon valley and technology powerhouses in the California bay area. Investors witnessed that there was a possibility for significant returns and that financial success could be had due to the risk mitigation that Milken demonstrated by investing in portfolios of so called high risk and low profile companies. We point out the current trend in many regions of the world, which is the birth of financial and technology firms and we suggest that finding innovative ways of financing could be the key to the sustained growth of these eco-systems.

Journal of Wealth Management, 2019

This paper acts as a collection of various trading strategies and useful pieces of market informa... more This paper acts as a collection of various trading strategies and useful pieces of market information that might help to implement such strategies. This list is meant to be comprehensive (though by no means exhaustive) and hence we only provide pointers and give further sources to explore each strategy further. To set the stage for this exploration, we consider the factors that determine good and bad trades, the notions of market efficiency, the real prospect amidst the seemingly high expectations of homogeneous expectations from human beings and the catch-22 connotations that arise while comprehending the true meaning of rational investing. We can broadly classify trading ideas and client market color material into Delta-One and Derivative strategies since this acts as a natural categorization that depends on the expertise of the various trading desks that will implement these strategies. For each strategy, we will have a core idea and we will present different flavors of this central theme to demonstrate that we can easily cater to the varying risk appetites, regional preferences, asset management styles, investment philosophies, liability constraints, investment horizons, notional trading size, trading frequency and other preferences of different market participants.

The Journal of Private Equity, 2019

We discuss a possible solution to an unintended consequence of having grades, certificates, ranki... more We discuss a possible solution to an unintended consequence of having grades, certificates, rankings and other diversions in the act of transferring knowledge; and zoom in specifically to the topic of having grades, on a curve. We conduct a thought experiment, taking a chapter (and some more?) from the financial markets, (where we trade pollution and what not?), to create a marketplace, where we can trade our grade, similar in structure to the interest rate swap. We connect this to broader problems that are creeping up, unintentionally, due to artificial labels we are attaching, to ourselves. The policy and philosophical implications of our arguments are to suggest that all trophies that we collect (including certificates, grades, medals etc.) should be viewed as personal equity or private equity (borrowing another widely used term in finance) and we should not use them to determine the outcomes in any selection criteria except have a cutoff point: either for jobs, higher studies, or, financial scholarships, other than for entertainment or spectator sports. We suggest alternate methods for grading and performance assessment and put forth tests for teaching and learning similar to the Turing Test for intelligence.

Research in Economics, 2018

We develop extensions to auction theory results that are useful in real life scenarios. 1. Sin... more We develop extensions to auction theory results that are useful in real life scenarios.

1. Since valuations are generally positive we first develop approximations using the log-normal distribution. This would be useful for many finance related auction settings since asset prices are usually non-negative.

2. We formulate a positive symmetric discrete distribution, which is likely to be followed by the total number of auction participants, and incorporate this into auction theory results.

3. We develop extensions when the valuations of the bidders are interdependent and incorporate all the results developed into a final combined realistic setting.

4. Our methods can be a practical tool for bidders and auction sellers to maximize their profits. The models developed here could be potentially useful for inventory estimation and for wholesale procurement of financial instruments and also non-financial commodities.

All the propositions are new results and they refer to existing results which are stated as Lemmas.

The equity risk premium puzzle is that the return on equities has far exceeded the average return... more The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a few attempts done over the years to explain this anomaly:

1. Inclusion of highly unlikely events with low probability (Ugly state along with Good and Bad), or market crashes, recently also termed as Black Swans.

2. Slow moving habit, or time-varying subsistence level, added to the basic power utility function.

3. Allowing for a separation of the inter-temporal elasticity of substitution and risk aversion, combined with consumption and dividend growth rates modeled as containing a small persistent expected growth rate component and a fluctuating volatility which captures time varying economic uncertainty.

We explore whether a fusion of the above approaches supplemented with better methods to handle the below reservations would provide a more realistic and yet tractable framework to tackle the various conundrums in the social sciences:

1. Unlimited ability of individuals to invest as compared to their ability to consume.

2. Lack of an objective measuring stick of value which gives rise to heterogeneous preferences and beliefs.

3. Unintended consequences due to the dynamic nature of social systems, where changes can be observed and decisions effected by participants to influence the system.

4. Relaxation of the transversality condition to avoid the formation of asset price bubbles.

5. How durable is durable? Since nothing lasts forever, accounting for durable goods to create a comprehensive measure of consumption volatility.

The world we live in produces fascinating phenomenon despite (or perhaps, due to) being a hotchpotch of varying doses of the above elements. The rationale for a unified theory is that beauty can emerge from chaos since the best test for a stew is its taste.

Many long standing puzzles seem to have been resolved using different techniques. The various explanations need to stand the test of time before acceptance; but then unexpected outcomes set in and new puzzles emerge. As real analysis and limits tell us: we are getting Closer and Closer; Yet it seems we are still Far Far Away...

Kashyap, R. (2017). Fighting Uncertainty with Uncertainty: A Baby Step. Theoretical Economics Letters, 7(5), 1431-1452., Aug 14, 2017

We can overcome uncertainty with uncertainty. Using randomness in our choices and in what we co... more We can overcome uncertainty with uncertainty. Using randomness in our choices and in what we control, and hence in the decision making process, could potentially offset the uncertainty inherent in the environment and yield better outcomes. The example we develop in greater detail is the news-vendor inventory management problem with demand uncertainty. We briefly discuss areas, where such an approach might be helpful, with the common prescription, “Don’t Simply Optimize, Also Randomize; perhaps best described by the term - Randoptimization”.

1. News-vendor Inventory Management
2. School Admissions
3. Journal Submissions
4. Job Candidate Selection
5. Stock Picking
6. Monetary Policy

This methodology is suitable for the social sciences since the primary source of uncertainty are the members of the system themselves and presently, no methods are known to fully determine the outcomes in such an environment, which perhaps would require being able to read the minds of everyone involved and to anticipate their actions continuously. Admittedly, we are not qualified to recommend whether such an approach is conducive for the natural sciences, unless perhaps, bounds can be established on the levels of uncertainty in a system and it is shown conclusively that a better understanding of the system and hence improved decision making will not alter the outcomes.

Market Microstructure is the investigation of the process and protocols that govern the exchange ... more Market Microstructure is the investigation of the process and protocols that govern the exchange of assets with the objective of reducing frictions that can impede the transfer. In financial markets, where there is an abundance of recorded information, this translates to the study of the dynamic relationships between observed variables, such as price, volume and spread, and hidden constituents, such as transaction costs and volatility, that hold sway over the efficient functioning of the system.

“My dear, here we must process as much data as we can, just to stay in business. And if you wish to make a profit you must process atleast twice as much data.” - Red Queen to Alice in Hedge-Fund-Land.

Necessity is the mother of all invention / creation / innovation, but the often forgotten father is frustration. In this age of (Too Much) Information, it is imperative to uncover nuggets of knowledge (signal) from buckets of nonsense (noise).

To aid in this effort to extract meaning from chaos and to gain a better understanding of the relationships between financial variables, we summarize the application of the theoretical results from (Kashyap 2016b) to microstructure studies. The central concept rests on a novel methodology based on the marriage between the Bhattacharyya distance, a measure of similarity across distributions, and the Johnson Lindenstrauss Lemma, a technique for dimension reduction, providing us with a simple yet powerful tool that allows comparisons between data-sets representing any two distributions.

We provide an empirical illustration using prices, volumes and volatilities across seven countries and three different continents. The degree to which different markets or sub groups of securities have different measures of their corresponding distributions tells us the extent to which they are different. This can aid investors looking for diversification or looking for more of the same thing.

In Indian mythology, it is believed that in each era, God takes on an avatar or reincarnation to fight the main source of evil in that epoch and to restore the balance between good and bad. In this age of too much information and complexity, perhaps the supreme being needs to be born as a data scientist, conceivably with an apt nickname, the Infoman. Until higher powers intervene and provide the ultimate solution to completely eliminate information overload, we have to make do with marginal methods, such as this composition, to reduce information.

As we wait for the perfect solution, it is worth meditating upon what superior beings would do when faced with a complex situation, such as the one we are in. It is said that the Universe is but the Brahma's (Creator's) dream. Research (Effort / Struggle) can help us understand this world; Sleep (Ease / Peace of Mind) can help us create our own world. A lesson from close by and down under: We need to “Do Some Yoga and Sleep Like A Koala”.

We look at a collection of conjectures with the unifying message that smaller social systems, ten... more We look at a collection of conjectures with the unifying message that smaller social systems, tend to be less complex and can be aligned better, towards fulfilling their intended objectives. We touch upon a framework, referred to as the four pronged approach that can aid the analysis of social systems. The four prongs are:

1. The Uncertainty Principle of the Social Sciences

2. The Objectives of a Social System or the Responsibilities of the Players

3. The Need for Smaller Organizations

4. Redirecting Unintended Outcomes

Smaller organizations mitigating the disruptive effects of corruption is discussed and also the need for organizations, whose objective is to foster the development of other smaller organizations. We consider a way of life, which is about respect for knowledge and a desire to seek it. Knowledge can help eradicate ignorance, but the accumulation of knowledge can lead to overconfidence. Hence it becomes important to instill an attitude that does not knowledge too seriously, along with the thirst for knowledge. All of this is important to create an environment that is conducive for smaller organizations and can be viewed as a natural extension of studies that fall under the wider category of understanding factors and policies aimed at increasing the welfare or well-being to society.

We utilize a fundamentally different model of trading costs to look at the effect of the opening ... more We utilize a fundamentally different model of trading costs to look at the effect of the opening of the Hong Kong Shanghai Connect that links the stock exchanges in the two cities, arguably the biggest event in international business and finance since Christopher Columbus set sail for India. We design a novel methodology that compensates for the lack of data on trading costs in China. We estimate trading costs across similar positions on the dual listed set of securities in Hong Kong and China, hoping to provide useful pieces of information to help scale “The Great Wall of Chinese Securities Trading Costs”. We then compare actual and estimated trading costs on a sample of real orders across the Hong Kong securities in the dual listed pair to establish the accuracy of our measurements.

The primary question we seek to address is “Which market would be better to trade to gain exposure to the same (or similar) set of securities or sectors?” We find that trading costs on Shanghai, which might have been lower than Hong Kong, might have become higher leading up to the Connect. What remains to be seen is whether this increase in trading costs is a temporary equilibrium due to the frenzy to gain exposure to Chinese securities or whether this phenomenon will persist once the two markets start becoming more and more tightly coupled.

It would be interesting to see if this pioneering policy will lead to securities exchanges across the globe linking up one another, creating a trade anything, anywhere and anytime marketplace. Looking beyond mere trading costs, such studies can be used to gather some evidence on what effect the mode of governance and other aspects of life in one country have on another country, once they start joining up their financial markets.