Related papers: Misspecified Recovery
We introduce the concept of forward rank-dependent performance processes, extending the original notion to forward criteria that incorporate probability distortions. A fundamental challenge is how to reconcile the time-consistent nature of…
Rough stochastic volatility models have attracted a lot of attentions recently, in particular for the linear option pricing problem. In this paper, starting with power utilities, we propose to use a martingale distortion representation of…
This papers addresses the stock option pricing problem in a continuous time market model where there are two stochastic tradable assets, and one of them is selected as a num\'eraire. It is shown that the presence of arbitrarily small…
The determination of acceptability prices of contingent claims requires the choice of a stochastic model for the underlying asset price dynamics. Given this model, optimal bid and ask prices can be found by stochastic optimization. However,…
We consider the supOU stochastic volatility model which is able to exhibit long-range dependence. For this model we give conditions for the discounted stock price to be a martingale, calculate the characteristic function, give a strip where…
Recent developments in deep learning techniques have motivated intensive research in machine learning-aided stock trading strategies. However, since the financial market has a highly non-stationary nature hindering the application of…
In recent years research on credit risk modelling has mainly focused on default probabilities. Recovery rates are usually modelled independently, quite often they are even assumed constant. Then, however, the structural connection between…
An asset pricing model using long-run capital share growth risk has recently been found to successfully explain U.S. stock returns. Our paper adopts a recursive preference utility framework to derive an heterogeneous asset pricing model…
"Fundamental theorem of asset pricing" roughly states that absence of arbitrage opportunity in a market is equivalent to the existence of a risk-neutral probability. We give a simple counterexample to this oversimplified statement. Prices…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
We propose a distributionally robust return-risk model for Markov decision processes (MDPs) under risk and reward ambiguity. The proposed model optimizes the weighted average of mean and percentile performances, and it covers the…
We consider the mean-variance hedging problem under partial information in the case where the flow of observable events does not contain the full information on the underlying asset price process. We introduce a martingale equation of a new…
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…
This study presents contemporaneous modeling of asset return and price range within the framework of stochastic volatility with leverage. A new representation of the probability density function for the price range is provided, and its…
Sample-based Bayesian inference provides a route to uncertainty quantification in the geosciences, and inverse problems in general, though is very computationally demanding in the naive form that requires simulating an accurate computer…
We introduce a novel framework to account for sensitivity to rewards uncertainty in sequential decision-making problems. While risk-sensitive formulations for Markov decision processes studied so far focus on the distribution of the…
We apply stochastic Perron's method to a singular control problem where an individual targets at a given consumption rate, invests in a risky financial market in which trading is subject to proportional transaction costs, and seeks to…
Recent results of Ye and Hansen, Miltersen and Zwick show that policy iteration for one or two player (perfect information) zero-sum stochastic games, restricted to instances with a fixed discount rate, is strongly polynomial. We show that…
In a continuous time stochastic economy, this paper considers the problem of consumption and investment in a financial market in which the representative investor exhibits a change in the discount rate. The investment opportunities are a…
It is a well known fact that recovery rates tend to go down when the number of defaults goes up in economic downturns. We demonstrate how the loss given default model with the default and recovery dependent via the latent systematic risk…