Related papers: Hedging Errors Induced by Discrete Trading Under a…
Deep hedging uses recurrent neural networks to hedge financial products that cannot be fully hedged in incomplete markets. Previous work in this area focuses on minimizing some measure of quadratic hedging error by calculating pathwise…
Optimal B-robust estimate is constructed for multidimensional parameter in drift coefficient of diffusion type process with small noise. Optimal mean-variance robust (optimal V -robust) trading strategy is find to hedge in mean-variance…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
We consider insurance derivatives depending on an external physical risk process, for example a temperature in a low dimensional climate model. We assume that this process is correlated with a tradable financial asset. We derive optimal…
In this paper, we argue that, once the costs of maintaining the hedging portfolio are properly taken into account, semi-static portfolios should more properly be thought of as separate classes of derivatives, with non-trivial,…
Goal-based investing is concerned with reaching a monetary investment goal by a given finite deadline, which differs from mean-variance optimization in modern portfolio theory. In this article, we expand the close connection between…
In this short note, we will show how to optimize the portfolio of a large trader whose hedging strategy affects the price of his assets.
The distribution of price returns for a class of uncorrelated diffusive dynamics is considered. The basic assumptions are (1) that there is a "consensus" value associated with a stock, and (2) that the rate of diffusion depends on the…
A constant weight asset allocation is a popular investment strategy and is optimal under a suitable continuous model. We study the tracking error for the target continuous rebalancing strategy by a feasible discrete-in-time rebalancing…
In order to investigate the origin of large price fluctuations, we analyze stock price changes of ten frequently traded NASDAQ stocks in the year 2002. Though the influence of the trading frequency on the aggregate return in a certain time…
In a fixed time horizon, appropriately executing a large amount of a particular asset -- meaning a considerable portion of the volume traded within this frame -- is challenging. Especially for illiquid or even highly liquid but also highly…
This paper is concerned with the study of insurance related derivatives on financial markets that are based on non-tradable underlyings, but are correlated with tradable assets. We calculate exponential utility-based indifference prices,…
We revisit optimal execution of an active portfolio in the presence of slippage (aka linear, proportional, or absolute-value) costs. Market efficiency implies a close balance between active alphas and trading costs, so even small changes to…
We consider an investor, whose portfolio consists of a single risky asset and a risk free asset, who wants to maximize his expected utility of the portfolio subject to the Value at Risk assuming a heavy tail distribution of the stock prices…
We propose a method for extending a given asset pricing formula to account for two additional sources of risk: the risk associated with future changes in market--calibrated parameters and the remaining risk associated with idiosyncratic…
This paper considers the optimal portfolio selection problem in a dynamic multi-period stochastic framework with regime switching. The risk preferences are of exponential (CARA) type with an absolute coefficient of risk aversion which…
We analyse derivative securities whose value is NOT a deterministic function of an underlying which means presence of a basis risk at any time. The key object of our analysis is conditional probability distribution at a given underlying…
We study option pricing and hedging with uncertainty about a Black-Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this…
Models of adaptive bet-hedging commonly adopt insights from Kelly's famous work on optimal gambling strategies and the financial value of information. In particular, such models seek evolutionary solutions that maximize long term average…
This paper proposes a theory of stock market predictability patterns based on a model of heterogeneous beliefs. In a discrete finite time framework, some agents receive news about an asset's fundamental value through a noisy signal. The…