In this paper, we study the theory of preference over unbounded random prospects using an axiomatic approach. We first show that Yaari's dual independence axiom can be decomposed into two axioms, the homogeneity axiom and the co-monotonic independence with respect to addition axiom, and we...

One of the important issues in behavioral analysis is that the time consistency property is lost due to the distortion in performance probability. The standard approach in performance optimization, the dynamic programming, fails to work in this area. In this paper, we propose to use an...

In this paper we develop a new delta expansion approach to deriving analytical approximation to the transition densities of multivariate diffusions using the Ito-Taylor expansion of the conditional expectation of the Dirac delta function. Our approach yields an explicit recursive formulas for...

The stochastic-alpha-beta-rho (SABR) model is widely used by practitioners in interest rate and foreign exchange markets. The probability of hitting zero sheds light on the arbitrage-free small strike implied volatility of the SABR model, and the survival probability is also closely related to...

In this paper, by adopting a quasi-Lamperti transform unitizing the process’ diffusion matrix at the initial time, we provide a new explicit recursive formula to compute the expansion coefficients for the pathwise Taylor expansion method of Li (2013). The quasi-Lamperti transform also allows...