Past Mathematical and Computational Finance Internal Seminar

Traditional diffusion models for random phenomena have paths with Holder

regularity just greater than 1/2 almost surely but there are situations

arising in finance and telecommunications where it is natural to look

for models in which the Holder regularity of the paths can vary.

Such processes are called multifractal and we will construct a class of

such processes on R using ideas from branching processes.

Using connections with multitype branching random walk we will be able

to compute the multifractal spectrum which captures the variability in

the Holder regularity. In addition, if we observe one of our processes

at a fixed resolution then we obtain a finite Markov representation,

which allows efficient simulation.

As an application, we fit the model to some AUD-USD exchange rate data.

Joint work with Geoffrey Decrouez and Ben Hambly

The question of how to derive useful bounds on

arbitrage-free prices of exotic options given only prices of liquidly

traded products like European call und put options has received much

interest in recent years. It also led to new insights about classic

problems in probability theory like the Skorokhod embedding problem. I

will take this as a starting point and show how this progress can be

used to give new results on general Monte-Carlo schemes.

I explore some new ideas on embedding problems for Brownian motion (and other Markov processes). I show how a (forward) Skorokhod embedding problem is transformed into an optimal stopping problem for the time-reversed process (Markov process in duality). This is deduced from the PDE (Variational Inequalities) interpretation of the classical results but then shown using probabilistic techniques and extended to give an n-marginal Root embedding. I also discuss briefly how to extend the approach to other embeddings such as the Azema-Yor embedding.

The aim of this lecture is to give a general introduction to

the interacting particle system and applications in finance, especially

in the pricing of American options. We survey the main techniques and

results on Snell envelope, and provide a general framework to analyse

these numerical methods. New algorithms are introduced and analysed

theoretically and numerically.

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We consider the pricing of American put options in a model-independent setting: that is, we do not assume that asset prices behave according to a given model, but aim to draw conclusions that hold in any model. We incorporate market information by supposing that the prices of European options are known. In this setting, we are able to provide conditions on the American Put prices which are necessary for the absence of arbitrage. Moreover, if we further assume that there are finitely many European and American options traded, then we are able to show that these conditions are also sufficient. To show sufficiency, we construct a model under which both American and European options are correctly priced at all strikes simultaneously. In particular, we need to carefully consider the optimal stopping strategy in the construction of our process. (Joint with Christoph Hoeggerl).

\textbf{Victor Fedyashov} \newline

\textbf{Title:} Ergodic BSDEs with jumps \newline

\textbf{Abstract:} We study ergodic backward stochastic differential equations (EBSDEs) with jumps, where the forward dynamics are given by a non-autonomous (time-periodic coefficients) Ornstein-Uhlenbeck process with Lévy noise on a separable Hilbert space. We use coupling arguments to establish existence of a solution. We also prove uniqueness of the Markovian solution under certain growth conditions using recurrence of the above mentioned forward SDE. We then give applications of this theory to problems of risk-averse ergodic optimal control.

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\textbf{Ruolong Chen} \newline

\textbf{Title:} tba \newline

\textbf{Abstract:}

\textbf{James Newbury} \newline

Title: Heavy traffic diffusion approximation of the limit order book in a one-sided reduced-form model. \newline

Abstract: Motivated by a zero-intelligence approach, we try to capture the

dynamics of the best bid (or best ask) queue in a heavy traffic setting,

i.e when orders and cancellations are submitted at very high frequency.

We first prove the weak convergence of the discrete-space best bid/ask

queue to a jump-diffusion process. We then identify the limiting process

as a regenerative elastic Brownian motion with drift and random jumps to

the origin.

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\textbf{Zhaoxu Hou} \newline

Title: Robust Framework In Finance: Martingale Optimal Transport and

Robust Hedging For Multiple Marginals In Continuous Time

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Abstract: It is proved by Dolinsky and Soner that there is no duality

gap between the robust hedging of path-dependent European Options and a

martingale optimal problem for one marginal case. Motivated by their

work and Mykland's idea of adding a prediction set of paths (i.e.

super-replication of a contingent claim only required for paths falling

in the prediction set), we try to achieve the same type of duality

result in the setting of multiple marginals and a path constraint.

Wei Wei

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Title: "Optimal Switching at Poisson Random Intervention Times"

(joint work with Dr Gechun Liang)

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Abstract: The paper introduces a new class of optimal switching problems, where

the player is allowed to switch at a sequence of exogenous Poisson

arrival times, and the underlying switching system is governed by an

infinite horizon backward stochastic differential equation system. The

value function and the optimal switching strategy are characterized by

the solution of the underlying switching system. In a Markovian setting,

the paper gives a complete description of the structure of switching

regions by means of the comparison principle.

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Julen Rotaetxe

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Title: Applicability of interpolation based finite difference method to problems in finance

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Abstract:

I will present the joint work with Christoph Reisinger on

the applicability of a numerical scheme relying on finite differences

and monotone interpolation to discretize linear and non-linear diffusion

equations. We propose suitable transformations to the process modeling

the underlying variable in order to overcome issues stemming from the

width of the stencil near the boundaries of the discrete spatial domain.

Numerical results would be given for typical diffusion models used in

finance in both the linear and non-linear setting.

More than half of the world's financial markets use a limit order book

mechanism to facilitate trade. For markets where trade is conducted

through a central counterparty, trading platforms disseminate the same

information about the limit order book to all market participants in

real time, and all market participants are able to trade with all

others. By contrast, in markets that operate under bilateral trade

agreements, market participants are only able to view the limit order

book activity from their bilateral trading partners, and are unable to

trade with the market participants with whom they do not possess a

bilateral trade agreement. In this talk, I discuss the implications

of such a market structure for price formation. I then introduce a

simple model of such a market, which is able to reproduce several

important empirical properties of traded price series. By identifying and

matching several robust moment conditions to the empirical data, I make

model-based inference about the network of bilateral trade partnerships

in the market. I discuss the implications of these findings for market

stability and suggest how the regulator might improve market conditions

by implementing simple restrictions on how market participants form their

bilateral trade agreements.

The aim of this lecture is to give a general introduction to

the interacting particle system and applications in finance, especially

in the pricing of American options. We survey the main techniques and

results on Snell envelope, and provide a general framework to analyse

these numerical methods. New algorithms are introduced and analysed

theoretically and numerically.

I will look at a toy model for an index in a large market. The aim is to

consider the pricing of volatility swaps on the index. This is very much

work in progress.

In this talk, We show that both reflected BSDE and its associated penalized BSDE admit both optimal stopping representation and optimal control

representation. We also show that both multidimensional reflected BSDE and its associated multidimensional penalized BSDE admit optimal switching representation. The corresponding optimal stopping problems for penalized BSDE have the feature that one is only allowed to stop at Poisson arrival times.