Related papers: Economic Neutral Position: How to best replicate n…
"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…
We consider the problem of optimal investment with random endowment in a Black--Scholes market for an agent with constant relative risk aversion. Using duality arguments, we derive an explicit expression for the optimal trading strategy,…
Random shifting typically appears in credibility models whereas random scaling is often encountered in stochastic models for claim sizes reflecting the time-value property of money. In this article we discuss some aspects of random shifting…
The principal portfolios of the standard Capital Asset Pricing Model (CAPM) are analyzed and found to have remarkable hedging and leveraging properties. Principal portfolios implement a recasting of any correlated asset set of N risky…
We propose a stochastic model allowing property and casualty insurers with multiple business lines to measure their liabilities for incurred claims risk and calculate associated capital requirements. Our model includes many desirable…
In this paper, we provide a model-independent extension of the paradigm of dynamic hedging of derivative claims. We relate model-independent replication strategies to local martingales having a closed form which we can characterise via…
This paper proposes two approaches that quantify the exact relationship among the viability, the absence of arbitrage, and/or the existence of the num\'eraire portfolio under minimal assumptions and for general continuous-time market…
We develop a risk-neutral spot and equity option market simulator for a single underlying, under which the joint market process is a martingale. We leverage an efficient low-dimensional representation of the market which preserves no static…
Banks must optimize risky investments, dividend payouts, and capital structure under tight Basel III solvency and liquidity constraints, while costly equity issuance serves as a distress-recovery tool. We formulate this as a stochastic…
This paper deals with applications of coherent risk measures to pricing in incomplete markets. Namely, we study the No Good Deals pricing technique based on coherent risk. Two forms of this technique are presented: one defines a good deal…
We use a replica approach to deal with portfolio optimization problems. A given risk measure is minimized using empirical estimates of asset values correlations. We study the phase transition which happens when the time series is too short…
In an incomplete semimartingale model of a financial market, we consider several risk-averse financial agents who negotiate the price of a bundle of contingent claims. Assuming that the agents' risk preferences are modelled by convex…
A risk-neutral valuation framework is developed for pricing and hedging in-play football bets based on modelling scores by independent Poisson processes with constant intensities. The Fundamental Theorems of Asset Pricing are applied to…
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…
In this paper we study a risk-minimizing hedging problem for a semimartingale incomplete financial market where d+1 assets are traded continuously and whose price is expressed in units of the num\'{e}raire portfolio. According to the…
In the present work, the optimal portfolio minimizing the investment risk with cost is discussed analytically, where this objective function is constructed in terms of two negative aspects of investment, the risk and cost. We note the…
We study a dynamic portfolio optimization problem related to convergence trading, which is an investment strategy that exploits temporary mispricing by simultaneously buying relatively underpriced assets and selling short relatively…
We introduce a criterion how to price derivatives in incomplete markets, based on the theory of growth optimal strategy in repeated multiplicative games. We present reasons why these growth-optimal strategies should be particularly relevant…
We propose a pricing technique based on coherent risk measures, which enables one to get finer price intervals than in the No Good Deals pricing. The main idea consists in splitting a liability into several parts and selling these parts to…
In incomplete financial markets not every contingent claim can be replicated by a self-financing strategy. The risk of the resulting shortfall can be measured by convex risk measures, recently introduced by F\"ollmer, Schied (2002). The…