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We maximize the expected utility from terminal wealth for an HARA investor when the market price of risk is an unobservable random variable. We compute the optimal portfolio explicitly and explore the effects of learning by comparing it…
An uncollateralized swap hedged back-to-back by a CCP swap is used to introduce FVA. The open IR01 of FVA, however, is a sure sign of risk not being fully hedged, a theoretical no-arbitrage pricing concern, and a bait to lure market risk…
This paper presents an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. We solve the problem in continuous time, for an investor with a…
We construct an utility-based dynamic asset pricing model for a limit order market. The price is nonlinear in volume and subject to market impact. We solve an optimal hedging problem under the market impact and derive the dynamics of the…
We apply the concepts of utility based pricing and hedging of derivatives in stochastic volatility markets and introduce a new class of "reciprocal affine" models for which the indifference price and optimal hedge portfolio for pure…
The dynamic hedging theory only makes sense in the setup of one given model, whereas the practice of dynamic hedging is just the opposite, with models fleeing after the data through daily recalibration. This is quite of a quantitative…
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,…
In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for…
The efficiency of a modern economy depends on what we call the Value-Tracking Hypothesis: that market prices of key assets broadly track some underlying value. This can be expected if a sufficient weight of market participants are…
This paper studies the optimal investment problem with random endowment in an inventory-based price impact model with competitive market makers. Our goal is to analyze how price impact affects optimal policies, as well as both pricing rules…
Model risk measures consequences of choosing a model in a class of possible alternatives. We find analytical and simulated bounds for payoff functions on classes of plausible alternatives of a given discrete model. We measure the impact of…
If a financial asset's price movement impacts a firm's product demand, the firm can respond to the impact by adjusting its operational decisions. For example, in the automotive industry, car makers decrease the selling prices of…
This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset…
Financial markets are often modelled as if time were unique and continuous across assets and markets. Financial markets are however asynchronous, order flow is event-driven, and waiting times between events are often random. Many of the…
AI stocks trade at extraordinary valuations. We develop an asset pricing model in which investors use AI stocks to hedge against an AI singularity that displaces their consumption. Because markets are incomplete -- investors cannot trade…
We consider the problem of maximizing portfolio value when an agent has a subjective view on asset value which differs from the traded market price. The agent's trades will have a price impact which affect the price at which the asset is…
A risk-averse agent hedges her exposure to a non-tradable risk factor $U$ using a correlated traded asset $S$ and accounts for the impact of her trades on both factors. The effect of the agent's trades on $U$ is referred to as cross-impact.…
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open…
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…
The effectiveness of utility-maximization techniques for portfolio management relies on our ability to estimate correctly the parameters of the dynamics of the underlying financial assets. In the setting of complete or incomplete financial…