A few evaluation criteria of optimum financing with random costs and benefits.
A general version of the fundamental theorem of asset pricing.
A note on extremality and completeness in financial markets with infinitely many risky assets
A priori error estimates for reduced order models in finance
Mathematical models for option pricing often result in partial differential equations. Recent enhancements are models driven by Lévy processes, which lead to a partial differential equation with an additional integral term. In the context of model calibration, these partial integro differential equations need to be solved quite frequently. To reduce the computational cost the implementation of a reduced order model has shown to be very successful numerically. In this paper we give a priori error...
A probability density function estimation using F-transform
The aim of this paper is to propose a new approach to probability density function (PDF) estimation which is based on the fuzzy transform (F-transform) introduced by Perfilieva in [10]. Firstly, a smoothing filter based on the combination of the discrete direct and continuous inverse F-transform is introduced and some of the basic properties are investigated. Next, an alternative approach to PDF estimation based on the proposed smoothing filter is established and compared with the most used method...
A stochastic programming approach to managing liquid asset portfolios
Maintaining liquid asset portfolios involves a high carry cost and is mandatory by law for most financial institutions. Taking this into account a financial institution's aim is to manage a liquid asset portfolio in an “optimal” way, such that it keeps the minimum required liquid assets to comply with regulations. In this paper we propose a multi-stage dynamic stochastic programming model for liquid asset portfolio management. The model allows for portfolio rebalancing decisions over a multi-period...
A variational inequality from pricing convertible bond.
Almost log-optimal trading strategies for small transaction costs in model with stochastic coefficients
We consider a non-consuming agent investing in a stock and a money market interested in the portfolio market price far in the future. We derive a strategy which is almost log-optimal in the long run in the presence of small proportional transaction costs for the case when the rate of return and the volatility of the stock market price are bounded It o processes with bounded coefficients and when the volatility is bounded away from zero.
An approximation formula for the price of credit default swaps under the fast-mean reversion volatility model
We consider the pricing of credit default swaps (CDSs) with the reference asset assumed to follow a geometric Brownian motion with a fast mean-reverting stochastic volatility, which is often observed in the financial market. To establish the pricing mechanics of the CDS, we set up a default model, under which the fair price of the CDS containing the unknown “no default” probability is derived first. It is shown that the “no default” probability is equivalent to the price of a down-and-out binary...
Arbitrage in markets without shortselling with proportional transaction costs
We consider markets with proportional transaction costs and shortsale restrictions. We give necessary and sufficient conditions for the absence of arbitrage and also estimate the super-replication price.
Bounds of Ruin Probabilities for Insurance Companies in the Presence of Stochastic Volatility on Investments⋆⋆⋆
In this work we consider a model of an insurance company where the insurer has to face a claims process which follows a Compound Poisson process with finite exponential moments. The insurer is allowed to invest in a bank account and in a risky asset described by Geometric Brownian motion with stochastic volatility that depends on an external factor modelled as a diffusion process. By using exponential martingale techniques we obtain upper and lower...
Bounds on integrals with respect to multivariate copulas
In this paper, we present a method to obtain upper and lower bounds on integrals with respect to copulas by solving the corresponding assignment problems (AP’s). In their 2014 paper, Hofer and Iacó proposed this approach for two dimensions and stated the generalization to arbitrary dimensons as an open problem. We will clarify the connection between copulas and AP’s and thus find an extension to the multidimensional case. Furthermore, we provide convergence statements and, as applications, we consider...
Chance constrained problems: penalty reformulation and performance of sample approximation technique
We explore reformulation of nonlinear stochastic programs with several joint chance constraints by stochastic programs with suitably chosen penalty-type objectives. We show that the two problems are asymptotically equivalent. Simpler cases with one chance constraint and particular penalty functions were studied in [6,11]. The obtained problems with penalties and with a fixed set of feasible solutions are simpler to solve and analyze then the chance constrained programs. We discuss solving both problems...
Chaos control of a fractional-order financial system.
Comparison principle approach to utility maximization
We consider the problem of optimal investment for maximal expected utility in an incomplete market with trading strategies subject to closed constraints. Under the assumption that the underlying utility function has constant sign, we employ the comparison principle for BSDEs to construct a family of supermartingales leading to a necessary and sufficient condition for optimality. As a consequence, the value function is characterized as the initial value of a BSDE with Lipschitz growth.
Consistent price systems for subfiltrations
Asymmetric or partial information in financial markets may be represented by different filtrations. We consider the case of a larger filtration F – the natural filtration of the “model world” – and a subfiltration that represents the information available to an agent in the “real world”. Given a price system on the larger filtration that is represented by a martingale measure Q and an associated numeraire S, we show that there is a canonical and nontrivial numeraire Ŝ such that the price system...
Development of the Stock Exchange Information System
DG method for numerical pricing of multi-asset Asian options—the case of options with floating strike
Option pricing models are an important part of financial markets worldwide. The PDE formulation of these models leads to analytical solutions only under very strong simplifications. For more general models the option price needs to be evaluated by numerical techniques. First, based on an ideal pure diffusion process for two risky asset prices with an additional path-dependent variable for continuous arithmetic average, we present a general form of PDE for pricing of Asian option contracts on two...
DG method for pricing European options under Merton jump-diffusion model
Under real market conditions, there exist many cases when it is inevitable to adopt numerical approximations of option prices due to non-existence of analytical formulae. Obviously, any numerical technique should be tested for the cases when the analytical solution is well known. The paper is devoted to the discontinuous Galerkin method applied to European option pricing under the Merton jump-diffusion model, when the evolution of the asset prices is driven by a Lévy process with finite activity....
DG method for the numerical pricing of two-asset European-style Asian options with fixed strike
The evaluation of option premium is a very delicate issue arising from the assumptions made under a financial market model, and pricing of a wide range of options is generally feasible only when numerical methods are involved. This paper is based on our recent research on numerical pricing of path-dependent multi-asset options and extends these results also to the case of Asian options with fixed strike. First, we recall the three-dimensional backward parabolic PDE describing the evolution of European-style...