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Quantitative Finance at arXiv wrote a new blog post titled Series representation of the pricing formula for the European option driven by space-time fractional diffusion. (arXiv:1712.04990v1 [q-fin.MF])
In this paper, we show that the price of an European call option, whose underlying asset price is driven by the space-time fractional diffusion, can be expressed in terms of rapidly convergent double-series. The series formula can be obtained from the Mellin-Barnes representation of the option price with help of residue summation in $\mathbb{C}^2$. We also derive the series representation for the associated risk-neutral factors, obtained by Esscher transform of the space-time fractional Green functions.
42 minutes ago
Quantitative Finance at arXiv wrote a new blog post titled The Mathematics of Market Timing. (arXiv:1712.05031v1 [q-fin.PM])
Market timing is an investment technique that tries to continuously switch investment into assets forecast to have better returns. What is the likelihood of having a successful market timing strategy? With an emphasis on modeling simplicity, I calculate the feasible set of market timing portfolios using index mutual fund data for perfectly timed (by hindsight) all or nothing quarterly switching between two asset classes, US stocks and bonds over the time period 1993--2017. The historical optimal timing path of switches is shown to be indistinguishable from a random sequence. The key result is...
43 minutes ago
Quantitative Finance at arXiv wrote a new blog post titled The consentaneous model of the financial markets exhibiting spurious nature of long-range memory. (arXiv:1712.05121v1 [q-fin.ST])
It is widely accepted that there is strong persistence in financial time series. The origin of the observed persistence, or long-range memory, is still an open problem as the observed phenomenon could be a spurious effect. Earlier we have proposed the consentaneous model of the financial markets based on the non-linear stochastic differential equations. The consentaneous model successfully reproduces empirical probability and power spectral densities of volatility. This approach is qualitatively different from models built using fractional Brownian motion. In this contribution we investigate...
44 minutes ago
Quantitative Finance at arXiv wrote a new blog post titled The evaluation of geometric Asian power options under time changed mixed fractional Brownian motion. (arXiv:1712.05254v1 [q-fin.PR])
The aim of this paper is to evaluate geometric Asian option by a mixed fractional subdiffusive Black-Scholes model. We derive a pricing formula for geometric Asian option when the underlying stock follows a time changed mixed fractional Brownian motion. We then apply the results to price Asian power options on the stocks that pay constant dividends when the payoff is a power function. Finally, lower bound of Asian options and some special cases are provided.
45 minutes ago
All About Alpha wrote a new blog post titled The Transformation of the Global Reinsurance Industry
A new paper from Milliman, a consultant to the insurance and financial services industries, discusses the ongoing transformation in and of the global reinsurance industry that alternative investment has created. About 20 years ago, in the wake of Hurricane Andrew and the Northridge earthquake, catastrophe bonds caught on as aRead More
3 hours ago
Complexity Digest wrote a new blog post titled Slime mould: the fundamental mechanisms of cognition
The slime mould Physarum polycephalum has been used in developing unconventional computing devices for in which the slime mould played a role of a sensing, actuating, and computing device. These devices treated the slime mould rather as an active living substrate yet the slime mould is a self-consistent living creature which evolved for millions of years and occupied most part of the world, but in any case, that living entity did not own true cognition, just automated biochemical mechanisms. To “rehabilitate” the slime mould from the rank of a purely living electronics element to...
6 hours ago
The Practical Quant wrote a new blog post titled Practical applications of reinforcement learning in industry
[A version of this post appears on the O'Reilly Radar.]An overview of commercial and industrial applications of reinforcement learning.The flurry of headlines surrounding AlphaGo Zero (the most recent version of DeepMind’s AI system for playing Go) means interest in reinforcement learning (RL) is bound to increase. Next to deep learning, RL is among the most followed topics in AI. For most companies, RL is something to investigate and evaluate but few organizations have identified use cases where RL may play a role. As we enter 2018, I want to briefly describe areas where RL has been...
7 hours ago
The Reformed Broker wrote a new blog post titled A Twist
I'm less confident that the prices of coins will be central to the mass adoption of blockchain....
10 hours ago
Complexity Digest wrote a new blog post titled CAPS 2018: Complexity And Policy Studies
CAPS 2018 is the second International Conference on Complexity and Policy Studies. This is a cross-disciplinary conference for research in which the tools of Complex Systems are used to examine a wide range of policies and procedures that promote, emphasize, contribute to, improve, or otherwise positively affect society. This scope includes new definitions, measures, and methodologies for tracking, understanding, and predicting impacts and trends, data sets, analytical methods, actors and populations, dynamic models, or social-level analysis.   CAPS...
20 hours ago
Quantitative Finance at arXiv wrote a new blog post titled QLBS: Q-Learner in the Black-Scholes(-Merton) Worlds. (arXiv:1712.04609v1 [q-fin.CP])
This paper presents a discrete-time option pricing model that is rooted in Reinforcement Learning (RL), and more specifically in the famous Q-Learning method of RL. We construct a risk-adjusted Markov Decision Process for a discrete-time version of the classical Black-Scholes-Merton (BSM) model, where the option price is an optimal Q-function. Pricing is done by learning to dynamically optimize risk-adjusted returns for an option replicating portfolio, as in the Markowitz portfolio theory. Using Q-Learning and related methods, once created in a parametric setting, the model is able to go...
yesterday
Quantitative Finance at arXiv wrote a new blog post titled Inverse Reinforcement Learning for Marketing. (arXiv:1712.04612v1 [q-fin.CP])
Learning customer preferences from an observed behaviour is an important topic in the marketing literature. Structural models typically model forward-looking customers or firms as utility-maximizing agents whose utility is estimated using methods of Stochastic Optimal Control. We suggest an alternative approach to study dynamic consumer demand, based on Inverse Reinforcement Learning (IRL). We develop a version of the Maximum Entropy IRL that leads to a highly tractable model formulation that amounts to low-dimensional convex optimization in the search for optimal model parameters. Using...
yesterday
Quantitative Finance at arXiv wrote a new blog post titled Optimal Stochastic Desencoring and Applications to Calibration of Market Models. (arXiv:1712.04844v1 [q-fin.CP])
Typically flat filling, linear or polynomial interpolation methods to generate missing historical data. We introduce a novel optimal method for recreating data generated by a diffusion process. The results are then applied to recreate historical data for stocks.
yesterday
Quantitative Finance at arXiv wrote a new blog post titled Stock market as temporal network. (arXiv:1712.04863v1 [q-fin.ST])
Financial networks have become extremely useful in characterizing the structure of complex financial systems. Meanwhile, the time evolution property of the stock markets can be described by temporal networks. We utilize the temporal network framework to characterize the time-evolving correlation-based networks of stock markets. The market instability can be detected by the evolution of the topology structure of the financial networks. We employ the temporal centrality as a portfolio selection tool. Those portfolios, which are composed of peripheral stocks with low temporal centrality scores,...
yesterday
The Reformed Broker wrote a new blog post titled A Year for the Books
And as you consider 2018, remember that double-digit gains are just as likely. ...
yesterday
Complexity Digest wrote a new blog post titled The Emergence of Consensus: A Primer
The origin of population-scale coordination has puzzled philosophers and scientists for centuries. Recently, game theory, evolutionary approaches and complex systems science have provided quantitative insights on the mechanisms of social consensus. However, the literature is vast and scattered widely across fields, making it hard for the single researcher to navigate it. This short review aims to provide a compact overview of the main dimensions over which the debate has unfolded and to discuss some representative examples. It focuses on those situations in which consensus emerges...
yesterday
Quantitative Finance at arXiv wrote a new blog post titled The Calculus of Democratization and Development. (arXiv:1712.04117v1 [econ.EM])
In accordance with "Democracy's Effect on Development: More Questions than Answers", we seek to carry out a study in following the description in the 'Questions for Further Study.' To that end, we studied 33 countries in the Sub-Saharan Africa region, who all went through an election which should signal a "step-up" for their democracy, one in which previously homogenous regimes transfer power to an opposition party that fairly won the election. After doing so, liberal-democracy indicators and democracy indicators were evaluated in the five years prior to and after the election took place, and...
2 days ago
Quantitative Finance at arXiv wrote a new blog post titled Fair valuation of L\'evy-type drawdown-drawup contracts with general insured and penalty functions. (arXiv:1712.04418v1 [q-fin.PR])
In this paper, we analyse some equity-linked contracts that are related to drawdown and drawup events based on assets governed by a geometric spectrally negative L\'evy process. Drawdown and drawup refer to the differences between the historical maximum and minimum of the asset price and its current value, respectively. We consider four contracts. In the first contract, a protection buyer pays a premium with a constant intensity $p$ until the drawdown of fixed size occurs. In return, he/she receives a certain insured amount at the drawdown epoch, which depends on the drawdown level at that...
2 days ago
All About Alpha wrote a new blog post titled State Street Forecasts on Smart Beta
State Street Global Advisors has a new paper out that seeks to help State Street clients “refine their own strategic asset allocation” especially insofar as their portfolios include smart beta investments, by explaining how State Street forecasts returns, and where the forecasts as to some of the factor returns standRead More
2 days ago