We derive no-arbitrage bounds for expected excess returns to generate scenarios used in financial optimization. The bounds allow to distinguish three regions: one where arbitrage opportunities will never exist, a second where arbitrage may be present, and a third, where arbitrage opportunities...

We compare two popular scenario tree generation methods in the context of financial optimization: Moment matching and scenario reduction. Using a simple problem with a known analytic solution, we find that moment matching, when accompanied by a check to ensure the absence of arbitrage...

Since its announcement made on Sept. 6, 2011, the Swiss National Bank (SNB) has been pursuing the goal of a minimum EUR/CHF exchange rate of 1.20, promising to intervene on currency markets to prevent the exchange rate from falling below this level. We use a compound option pricing approach to...

Order flow imbalance refers to the difference between market buy and sell orders during a given period. This paper analyzes effects of order flow imbalance on returns of stocks traded on the German Xetra trading system on a daily basis. It is the first study examining this relation for the...

We use data from betting markets to analyze the sensitivity of stock returns to potential outcomes of political events such as elections. By classifying stocks into expected conditional winners and losers prior to such an event, we form portfolios that generate large positive returns after the...

For most events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state...

Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or referendums, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral event probabilities...

We develop a simulation algorithm that generates multivariate samples with exact means, covariances, and multivariate skewness. If required for financial applications, absence of arbitrage can be ensured. Potential applications include the simulation of risk factors for the risk management of...

The literature on the effects of parameter uncertainty on optimal portfolio choice suggests the existence of a premium for parameter uncertainty in asset returns. We use a simple extension to classical mean-variance portfolio optimization and devise a robust strategy to benefit from such a...

We consider optimal consumption and (strategic) asset allocation of an investor with uncertain lifetime. The problem is solved using a multi-stage stochastic linear programming (SLP) model to be able to generalize the closed-form solution obtained by Richard (1975). We account for aspects of the...