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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…
A new approach to obtaining market--directional information, based on a non-stationary solution to the dynamic equation "future price tends to the value that maximizes the number of shares traded per unit time" [1] is presented. In our…
Dynamic hedging strategies are essential for effective risk management in derivatives markets, where volatility and market sentiment can greatly impact performance. This paper introduces a novel framework that leverages large language…
A dynamical price formation model for financial assets is presented. It aims to capture the essence of speculative trading where mispricings of assets are used to make profits. It is shown that together with the incorporation of the concept…
This study explores the use of Transformer-based models to predict both covariance and semi-covariance matrices for ETF portfolio optimization. Traditional portfolio optimization techniques often rely on static covariance estimates or…
Prediction models calibrated using historical data may forecast poorly if the dynamics of the present and future differ from observations in the past. For this reason, predictions can be improved if information like forward looking views…
We study dynamic hedging of counterparty risk for a portfolio of credit derivatives. Our empirically driven credit model consists of interacting default intensities which ramp up and then decay after the occurrence of credit events. Using…
This paper studies the finite horizon portfolio management by optimally tracking a ratcheting capital benchmark process. It is assumed that the fund manager can dynamically inject capital into the portfolio account such that the total…
Since Hobson's seminal paper [D. Hobson: Robust hedging of the lookback option. In: Finance Stoch. (1998)] the connection between model-independent pricing and the Skorokhod embedding problem has been a driving force in robust finance. We…
This paper studies a robust portfolio optimization problem under the multi-factor volatility model introduced by Christoffersen et al. (2009). The optimal strategy is derived analytically under the worst-case scenario with or without…
We propose an online algorithm for tracking a multidimensional time-varying parameter of a time series, which is also allowed to be a predictable process with respect to the underlying time series. The algorithm is driven by a gain…
Decision-making pipelines are generally characterized by tradeoffs among various risk functions. It is often desirable to manage such tradeoffs in a data-adaptive manner. As we demonstrate, if this is done naively, state-of-the art…
We introduce a model for the loss distribution of a credit portfolio considering a contagion mechanism for the default of names which is the result of two independent components: an infection attempt generated by defaulting entities and a…
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…
This paper has been withdrawn by the authors. We present a framework for sequential decision making in problems described by graphical models. The setting is given by dependent discrete random variables with associated costs or revenues. In…
Robust control problems have significant practical implications since external disturbances can significantly impact the performance of control methods. Existing robust control methods excel at control-affine systems but fail at neural…
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…
Accurately assessing financial risk requires capturing both individual asset volatility and the complex, asymmetric dependence structures that emerge during extreme market events. While modern diffusion-based models have advanced…
The event of large losses plays an important role in credit risk. As these large losses are typically rare, and portfolios usually consist of a large number of positions, large deviation theory is the natural tool to analyze the tail…
We propose a new financial model, the stochastic volatility model with sticky drawdown and drawup processes (SVSDU model), which enables us to capture the features of winning and losing streaks that are common across financial markets but…