Related papers: On Carr and Lee's correlation immunization strateg…
The paper investigates quadratic hedging in a semimartingale market that does not necessarily contain a risk-free asset. An equivalence result for hedging with and without numeraire change is established. This permits direct computation of…
We propose a new `hedged' Monte-Carlo (HMC) method to price financial derivatives, which allows to determine simultaneously the optimal hedge. The inclusion of the optimal hedging strategy allows one to reduce the financial risk associated…
We develop a theory for option pricing with perfect hedging in an inefficient market model where the underlying price variations are autocorrelated over a time tau. This is accomplished by assuming that the underlying noise in the system is…
The cryptocurrency market is volatile, non-stationary and non-continuous. Together with liquid derivatives markets, this poses a unique opportunity to study risk management, especially the hedging of options, in a turbulent market. We study…
In this paper we study the quality of model-free valuation approaches for financial derivatives by systematically evaluating the difference between model-free super-hedging strategies and the realized payoff of financial derivatives using…
Finding the hedge ratios for a portfolio and risk compression is the same mathematical problem. Traditionally, regression is used for this purpose. However, regression has its own limitations. For example, in a regression model, we can't…
We propose a portfolio approach for operational risk quantification based on a class of analytical models from which we derive new results on the correlation problem. In particular, we show that uniform correlation is a robust assumption…
This article presents a deep reinforcement learning approach to price and hedge financial derivatives. This approach extends the work of Guo and Zhu (2017) who recently introduced the equal risk pricing framework, where the price of a…
The problem of stock hedging is reconsidered in this paper, where a put option is chosen from a set of available put options to hedge the market risk of a stock. A formula is proposed to determine the probability that the potential loss…
We introduce a novel signature approach for pricing and hedging path-dependent options with instantaneous and permanent market impact under a mean-quadratic variation criterion. Leveraging the expressive power of signatures, we recast an…
Many immunization strategies have been proposed to prevent infectious viruses from spreading through a network. In this study, we propose efficient immunization strategies to prevent a default contagion that might occur in a financial…
We present a semi-static hedging algorithm for callable interest rate derivatives under an affine, multi-factor term-structure model. With a traditional dynamic hedge, the replication portfolio needs to be updated continuously through time…
Purpose: This study introduces a novel framework for identifying and exploiting predictive lead-lag relationships in financial markets. We propose an integrated approach that combines advanced statistical methodologies with machine learning…
In this work, we introduce a Monte Carlo method for the dynamic hedging of general European-type contingent claims in a multidimensional Brownian arbitrage-free market. Based on bounded variation martingale approximations for…
This paper is concerned with an optimal reinsurance and investment problem for an insurance firm under the criterion of mean-variance. The driving Brownian motion and the rate in return of the risky asset price dynamic equation cannot be…
Research in quantitative finance has demonstrated that reinforcement learning (RL) methods have delivered promising outcomes in the context of hedging financial portfolios. For example, hedging a portfolio of European options using RL…
Estimation of the covariance matrix of asset returns is crucial to portfolio construction. As suggested by economic theories, the correlation structure among assets differs between emerging markets and developed countries. It is therefore…
We consider the problem of fair pricing and hedging under small perturbations of the num\'eraire. We show that for replicable claims, the change of num\'eraire affects neither the fair price nor the hedging strategy. For non-replicable…
A discretization scheme for nonnegative diffusion processes is proposed and the convergence of the corresponding sequence of approximate processes is proved using the martingale problem framework. Motivations for this scheme come typically…
We combine the one-dimensional Monte Carlo simulation and the semi-analytical one-dimensional heat potential method to design an efficient technique for pricing barrier options on assets with correlated stochastic volatility. Our approach…