Related papers: The potential approach in practice
Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of systemic risk requires the design and implementation of tools for the efficient…
A unified approach to quintessence and inflation is investigated with the use of a single scalar field. It is argued that successful potentials have to approximate a combination of exponential and inverse power-law decline in the limit of…
Recent empirical studies suggest that the volatility of an underlying price process may have correlations that decay slowly under certain market conditions. In this paper, the volatility is modeled as a stationary process with long-range…
The pricing of options, warrants and other derivative securities is one of the great success of financial economics. These financial products can be modeled and simulated using quantum mechanical instruments based on a Hamiltonian…
Empirical likelihood is a powerful semi-parametric method increasingly investigated in the literature. However, most authors essentially focus on an i.i.d. setting. In the case of dependent data, the classical empirical likelihood method…
A general method to construct recombinant tree approximations for stochastic volatility models is developed and applied to the Heston model for stock price dynamics. In this application, the resulting approximation is a four tuple Markov…
We present a method for incorporating a stochastic point of view into physics exercises of mathematics education. The core of our method is the randomization of some inputs, the system model used does not differ from what we would use in…
We propose a dynamical model for the estimation of Operational Risk in banking institutions. Operational Risk is the risk that a financial loss occurs as the result of failed processes. Examples of operational losses are the ones generated…
Measuring model risk is required by regulators on financial and insurance markets. We separate model risk into parameter estimation risk and model specification risk, and we propose expected shortfall type model risk measures applied to…
The present paper provides the basis for a novel financial asset pricing model that could avoid the shortcomings of, or even completely replace the traditional DCF model. The model is based on Brownian motion logic and expected future cash…
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate…
Markov automata combine non-determinism, probabilistic branching, and exponentially distributed delays. This compositional variant of continuous-time Markov decision processes is used in reliability engineering, performance evaluation and…
This paper develops a method to derive optimal portfolios and risk premia explicitly in a general diffusion model for an investor with power utility and a long horizon. The market has several risky assets and is potentially incomplete.…
In this paper we present an algorithm for pricing barrier options in one-dimensional Markov models. The approach rests on the construction of an approximating continuous-time Markov chain that closely follows the dynamics of the given…
The paper treats the financial market as a communication system, using four information-theoretic assumptions to derive an idealized model with only one parameter. State variables are scalar stationary diffusions. The model minimizes the…
The aim of a probabilistic output analysis is to derive a probability distribution of possible output values for a program from a probability distribution of its input. We present a method for performing static output analysis, based on…
We investigate LIBOR-based derivatives using a parsimonious field theory interest rate model capable of instilling imperfect correlation between different maturities. Delta and Gamma hedge parameters are derived for LIBOR Caps against…
At present, there is an explosion of practical interest in the pricing of interest rate (IR) derivatives. Textbook pricing methods do not take into account the leptokurticity of the underlying IR process. In this paper, such a leptokurtic…
In a stochastic volatility framework, we find a general pricing equation for the class of payoffs depending on the terminal value of a market asset and its final quadratic variation. This allows a pricing tool for European-style claims…
Estimating and controlling large risks has become one of the main concern of financial institutions. This requires the development of adequate statistical models and theoretical tools (which go beyond the traditionnal theories based on…