Related papers: Elements for a Theory of Financial Risks
Diffusion processes driven by Fractional Brownian motion (FBM) have often been considered in modeling stock price dynamics in order to capture the long range dependence of stock price observed in reality. Option prices for such models had…
This paper outlines, and through stylized examples evaluates a novel and highly effective computational technique in quantitative finance. Empirical Risk Minimization (ERM) and neural networks are key to this approach. Powerful open source…
Reliable calculations of financial risk require that the fat-tailed nature of prices changes is included in risk measures. To this end, a non-Gaussian approach to financial risk management is presented, modeling the power-law tails of the…
The postulational basis of classical thermodynamics has been expanded to incorporate equilibrium fluctuations. The main additional elements of the proposed thermodynamic theory are the concept of quasi-equilibrium states, a definition of…
The paper treats the financial market as a communication system, using four information-theoretic assumptions to derive an idealized model with only one parameter. State variables are scalar stationary diffusions. The model minimizes the…
Modern evolvements of the technologies have been leading to a profound influence on the financial market. The introduction of constituents like Exchange-Traded Funds, and the wide-use of advanced technologies such as algorithmic trading,…
The fluctuations in nonequilibrium systems are under intense theoretical and experimental investigation. Topical ``fluctuation relations'' describe symmetries of the statistical properties of certain observables, in a variety of models and…
In this paper, we describe a general method for constructing the posterior distribution of an option price. Our framework takes as inputs the prior distributions of the parameters of the stochastic process followed by the underlying, as…
A classical portfolio theory deals with finding the optimal proportion in which an agent invests a wealth in a risk-free asset and a probabilistic risky asset. Formulating and solving the problem depend on how the risk is represented and…
Most people are risk-averse (risk-seeking) when they expect to gain (lose). Based on a generalization of ``expected utility theory'' which takes this into account, we introduce an automaton mimicking the dynamics of economic operations.…
This survey reviews recent developments in revealed preference theory. It discusses the testable implications of theories of choice that are germane to specific economic environments. The focus is on expected utility in risky environments;…
The recent explosion in the amount and dimensionality of data has exacerbated the need of trading off computational and statistical efficiency carefully, so that inference is both tractable and meaningful. We propose a framework that…
This paper derives -- considering a Gaussian setting -- closed form solutions of the statistics that Adrian and Brunnermeier and Acharya et al. have suggested as measures of systemic risk to be attached to individual banks. The statistics…
We show how one can actually take advantage of the strongly non-Gaussian nature of the fluctuations of financial assets to simplify the calculation of the Value-at-Risk of complex non linear portfolios. The resulting equations are not hard…
We use Fourier analysis to access risk in financial products. With it we analyze price changes of e.g. stocks. Via Fourier analysis we scrutinize quantitatively whether the frequency of change is higher than a change in (conserved) company…
We propose that predictability is a prerequisite for profitability on financial markets. We look at ways to measure predictability of price changes using information theoretic approach and employ them on all historical data available for…
An interesting analog circuit for simulating a signal with fluctuations having a probability density function with a power tail has recently been proposed and constructed. The exponent of the power law can be fixed by tuning an appropriate…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
We show, by studying in detail the market prices of options on liquid markets, that the market has empirically corrected the simple, but inadequate Black-Scholes formula to account for two important statistical features of asset…
This study delves into the intricate realm of risk evaluation within the domain of specific financial derivatives, notably options. Unlike other financial instruments, like bonds, options are susceptible to broader risks. A distinctive…