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We use the technique of information relaxation to develop a duality-driven iterative approach to obtaining and improving confidence interval estimates for the true value of finite-horizon stochasticdynamic programming problems. We show that the sequence of dual value estimates yielded from the...
Persistent link: https://www.econbiz.de/10012848670
In this paper we use the property that certainty equivalence, as implied by a first-order approximation to the solution of stochastic discrete-time models, breaks in its equivalent continuous-time version. We study the extent to which a first-order approximated solution built by perturbation...
Persistent link: https://www.econbiz.de/10012852362
The proliferation of algorithmic high-frequency trading in financial markets has also led to an increase in new types of fraudulent activity. Since the flash-crash of 2010 first brought it to popular prominence, layering or spoofing fraud has become a major concern for financial regulators...
Persistent link: https://www.econbiz.de/10012891797
The effective management of uncertainty and complexity in premium pricing and reserve accumulation processes provide new challenges to the decision- and policy- makers. In this regard, the implementation of complex mathematical tools and advanced statistical techniques is highly acquired. Over...
Persistent link: https://www.econbiz.de/10012898666
A stochastic optimization framework is presented for liquidity risk management which is one of the principle issues facing an asset/liability manager. The various sources of cashflow uncertainty are first introduced. The notion of portfolio risk is then formally defined. The concepts of a risk...
Persistent link: https://www.econbiz.de/10012941211
In this paper, we study the hedging problem based on the CVaR in incomplete markets. As the superhedging is quite expensive in terms of initial capital, we construct a self-financing strategy that minimizes the CVaR of hedging risk under a budget constraint on the initial capital. In incomplete...
Persistent link: https://www.econbiz.de/10012933340
In the last five years, the financial industry has been impacted by the emergence of digitalization and machine learning. In this article, we explore two methods that have undergone rapid development in recent years: Gaussian processes and Bayesian optimization. Gaussian processes can be seen as...
Persistent link: https://www.econbiz.de/10012891532
This paper develops and analyses convergence properties of a novel multi-level Monte-Carlo (mlMC) method for computing prices and hedging parameters of plain-vanilla European options under a very general $b$-dimensional jump-diffusion model, where $b$ is arbitrary. The model includes stochastic...
Persistent link: https://www.econbiz.de/10012972095
Generalising the idea of the classical EM algorithm that is widely used for computing maximum likelihood estimates, we propose an EM-Control (EM-C) algorithm for solving multi-period finite time horizon stochastic control problems. The new algorithm sequentially updates the control policies in...
Persistent link: https://www.econbiz.de/10012979815
The regulatory credit value adjustment (CVA) for an outstanding over-the-counter (OTC) derivative portfolio, is computed based on the portfolio exposure over its lifetime. Usually the future portfolio exposure is approximated using Monte Carlo simulation, as the portfolio value can be driven by...
Persistent link: https://www.econbiz.de/10013005550