We consider the dynamic control problem of attaining a target position at a finite time T, while minimizing a linear-quadratic cost functional depending on the position and speed. We assume that the coefficients of the linear-quadratic cost functional are stochastic processes adapted to a Brownian filtration. We provide a probabilistic solution in terms of two coupled backward stochastic differential equations possessing a singularity at the terminal time T. We verify optimality of the candidate...

The following problem in risk theory is considered. An insurance company, endowed with an initial capital a > 0, receives insurance premiums and pays out successive claims from two kind of risks. The losses occur according to a marked point process. At any time the company may broaden or narrow down the offer, which entails the change of the parameters of the underlying risk process. These changes concern the rate of income, the intensity of the renewal process and the distribution of claims....

La finance de marché est devenue un des domaines d'ap- plication privilégiés de la recherche opérationnelle. D'un autre côté, rares sont les applications touchant la banque de détail, tournée vers le grand public. Dans ce papier, nous abordons un problème d'actualité dans le secteur bancaire français : l'optimisation de plans de financement immobiliers. Le travail que nous présentons a été effectué dans le cadre du développement par la société Experian-Prologia d'une nouvelle application d'instruction...

The goal of this paper is to make an attempt to generalise the model of pricing European options with an illiquid underlying asset considered by Rogers and Singh (2010). We assume that an investor's decisions have only a temporary effect on the price, which is proportional to the square of the change of the number of asset units in the investor's portfolio. We also assume that the underlying asset price follows a CEV model. To prove existence and uniqueness of the solution, we use techniques similar...

The paper presents a discontinuous Galerkin method for solving partial integro-differential equations arising from the European as well as American option pricing when the underlying asset follows an exponential variance gamma process. For practical purposes of numerical solving we introduce the modified option pricing problem resulting from a localization to a bounded domain and an approximation of small jumps, and we discuss the related error estimates. Then we employ a robust numerical procedure...

Let ${𝔽}_{}^{}$F be a filtration andτbe a random time. Let ${𝔾}_{}^{}$G be the progressive enlargement of ${𝔽}_{}^{}$F withτ. We study the following formula, called the optional splitting formula: For any ${𝔾}_{}^{}$G-optional processY, there exists an ${𝔽}_{}^{}$F-optional processY′ and a function Y′′ defined on [0,∞] × (ℝ+ × Ω) being $ℬ[0,\infty ]\otimes 𝒪\left({𝔽}_{}^{}\right)$ℬ[0,∞]⊗x1d4aa;(F) measurable, such that $Y=Y^{\text{'}}{1}_{[0,\tau )}^{}+Y^{\text{'}\text{'}}\left(\tau \right){\mathbb{1}}_{[\tau ,\infty )}^{}.$Y=Y′1[0,τ)+Y′′(τ)1[τ,∞). (This formula can also be formulated for multiple random timesτ1,...,τk). We are interested in this formula because of its fundamental role in many...

We study, in a Hilbert framework, some abstract parabolic variational inequalities, governed by reflecting subgradients with multiplicative perturbation, of the following type: y´(t)+ Ay(t)+0.t Θ(t,y(t)) ∂φ(y(t))∋f(t,y(t)),y(0) = y0,t ∈[0,T] where A is a linear self-adjoint operator, ∂φ is the subdifferential operator of a proper lower semicontinuous convex function φ defined on a suitable Hilbert space, and Θ is the perturbing term which acts on the set of reflecting directions, destroying the...

For a proper assessment of risks associated with the trading of derivatives, the performance of hedging strategies should be evaluated not only in the context of the idealized model that has served as the basis of strategy development, but also in the context of other models. In this paper we consider the class of so-called interval models as a possible testing ground. In the context of such models the fair price of a derivative contract is not uniquely determined and we characterize the interval...

Based upon an observation that it is too restrictive to assume a definite correlation of the underlying asset price and its volatility, we use a hybrid model of the constant elasticity of variance and stochastic volatility to study a portfolio optimization problem for pension plans. By using asymptotic analysis, we derive a correction to the optimal strategy for the constant elasticity of variance model and subsequently the fine structure of the corrected optimal strategy is revealed. The result...

We investigate the properties of a rating migration process assuming that it is given by subordination of a discrete time Markov chain and a Cox process. The problem of pricing of defaultable bonds with fractional recovery of par value with rating migration and credit default swaps is considered. As an example of applications of our results, we give an explicit solution to the pricing problem in a model with short rate and intensity processes given by the solution of a two-dimensional Ornstein-Uhlenbeck...

Successful solution to any environmental problem implies working with Knightian uncertainty that explicitly deals with decision making under conditions of unstructured randomness. A 'wild' type of randomness that we will never discern due to its unstable properties makes the assignment of corresponding probabilities impossible. For that reason, the consideration of general economical factors within cost/benefit analysis must fail. So, instead of governmental intervention and a cup and trade scheme,...

With the pioneering work of [Pardoux and Peng, Syst. Contr. Lett.14 (1990) 55–61; Pardoux and Peng, Lecture Notes in Control and Information Sciences176 (1992) 200–217]. We have at our disposal stochastic processes which solve the so-called backward stochastic differential equations. These processes provide us with a Feynman-Kac representation for the solutions of a class of nonlinear partial differential equations (PDEs) which appear in many applications in the field of Mathematical Finance....

In this paper we formulate a general model of the continuous double auction. We (recursively) describe the distribution of the model. As a useful by-product, we give a (recursive) analytic description of the distribution of the process of the best quotes (bid and ask).