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Our popular course Introduction to QuantLib Development will be taking place June 18-20th, 2018.

 

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Quantitative Finance at arXiv wrote a new blog post titled Arbitrage-Free Pricing of Game Options in Nonlinear Markets. (arXiv:1807.05448v1 [q-fin.MF])
The goal is to re-examine and extend the findings from the recent paper by Dumitrescu, Quenez and Sulem (2017) who studied game options within the nonlinear arbitrage-free pricing approach developed in El Karoui and Quenez (1997). We consider the setup introduced in Kim, Nie and Rutkowski (2018) where contracts of an American style were examined. We give a detailed study of unilateral pricing, hedging and exercising problems for the counterparties within a general nonlinear setup. We also present a BSDE approach, which is used to obtain more explicit results under suitable assumptions about...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled On the optimal choice of strike conventions in exchange option pricing. (arXiv:1807.05396v1 [q-fin.MF])
An important but rarely-addressed option pricing question is how to choose appropriate strikes for implied volatility inputs when pricing more exotic multi-asset derivatives. By means of Malliavin Calculus we construct an optimal log-linear strikevconvention for exchange options under stochastic volatility models. This novel approach allows us to minimize the difference between the corresponding Margrabe computed price and the true option price. We show that this optimal convention does not depend on the specific stochastic volatility model chosen. Numerical examples are given which provide...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Characterizing Cryptocurrency market with Levy's stable distributions. (arXiv:1807.05360v1 [q-fin.ST])
Recent emergence of cryptocurrencies such as Bitcoin and Ethereum has posed possible alternatives to global payments as well as financial assets around the globe, so measuring their financial risk is crucial for investors and financial regulators. Analysis of price fluctuations in financial markets is often based on the assumption of a Gaussian distribution, which fails to capture the extreme values and leads to the underestimating of the risks. In this paper we first show that the behaviors of price fluctuations of cryptocurrencies can also be characterized by the fat-tail Levy's stable...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Rebalancing Frequency Considerations for Kelly-Optimal Stock Portfolios in a Control-Theoretic Framework. (arXiv:1807.05265v1 [q-fin.PM])
In this paper, motivated by the celebrated work of Kelly, we consider the problem of portfolio weight selection to maximize expected logarithmic growth. Going beyond existing literature, our focal point here is the rebalancing frequency which we include as an additional parameter in our analysis. The problem is first set in a control-theoretic framework, and then, the main question we address is as follows: In the absence of transaction costs, does high-frequency trading always lead to the best performance? Related to this is our prior work on betting, also in the Kelly context, which...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Improving Value-at-Risk prediction under model uncertainty. (arXiv:1805.03890v3 [q-fin.RM] UPDATED)
Several well-established benchmark predictors exist for Value-at-Risk (VaR), a major instrument for financial risk management. Hybrid methods combining AR-GARCH filtering with skewed-$t$ residuals and the extreme value theory-based approach are particularly recommended. This study introduces yet another VaR predictor, G-VaR, which follows a novel methodology. Inspired by the recent mathematical theory of sublinear expectation, G-VaR is built upon the concept of model uncertainty, which in the present case signifies that the inherent volatility of financial returns cannot be characterized by a...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Arbitrage-free pricing of American options in nonlinear markets. (arXiv:1804.10753v2 [q-fin.MF] UPDATED)
We re-examine and extend the findings from the recent paper by Dumitrescu, Quenez and Sulem (2018) who studied American and game options in a particular market model using the nonlinear arbitrage-free pricing approach developed in El Karoui and Quenez (1997). In the first part, we provide a detailed study of unilateral valuation problems for the two counterparties in an American-style contract within the framework of a general nonlinear market. We extend results from Bielecki and Rutkowski (2015) and Bielecki, Cialenco and Rutkowski (2018) who examined the case of a European-style contract....
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled High Dimensional Estimation and Multi-Factor Models. (arXiv:1804.08472v2 [q-fin.ST] UPDATED)
This paper re-investigates the estimation of multiple factor models relaxing the convention that the number of factors is small and using a new approach for identifying factors. We first obtain the collection of all possible factors and then provide a simultaneous test, security by security, of which factors are significant. Since the collection of risk factors is large and highly correlated, high-dimension methods (including the LASSO and prototype clustering) have to be used. The multi-factor model is shown to have a significantly better fit than the Fama-French 5-factor model. Robustness...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Hedging with transient price impact for non-covered and covered options. (arXiv:1807.05917v1 [q-fin.PR])
We solve the superhedging problem for European options in a market with finite liquidity where trading has transient impact on prices, and possibly a permanent one in addition. Impact is multiplicative to ensure positive asset prices. Hedges and option prices depend on the physical and cash delivery specifications of the option settlement. For non-covered options, where impact at the inception and maturity dates matters, we characterize the superhedging price as a viscosity solution of a degenerate semilinear pde that can have gradient constraints. The non-linearity of the pde is governed by...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Methods of nonlinear dynamics and the construction of cryptocurrency crisis phenomena precursors. (arXiv:1807.05837v1 [q-fin.ST])
This article demonstrates the possibility of constructing indicators of critical and crisis phenomena in the volatile market of cryptocurrency. For this purpose, the methods of the theory of complex systems such as recurrent analysis of dynamic systems and the calculation of permutation entropy are used. It is shown that it is possible to construct dynamic measures of complexity, both recurrent and entropy, which behave in a proper way during actual pre-crisis periods. This fact is used to build predictors of crisis phenomena on the example of the main five crises recorded in the time series...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Forecasting market states. (arXiv:1807.05836v1 [q-fin.ST])
We propose a novel methodology to define, analyse and forecast market states. In our approach market states are identified by a reference sparse precision matrix and a vector of expectation values. In our procedure each multivariate observation is associated to a given market state accordingly to a penalized likelihood maximization. The procedure is made computationally very efficient and can be used with a large number of assets. We demonstrate that this procedure successfully classifies different states of the markets in an unsupervised manner. In particular, we describe an experiment with...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Consumption smoothing in the working-class households of interwar Japan. (arXiv:1807.05737v1 [q-fin.EC])
I analyze Osaka factory worker households in the early 1920s, whether idiosyncratic income shocks were shared efficiently, and which consumption categories were robust to shocks. While the null hypothesis of full risk-sharing of total expenditures was rejected, factory workers maintained their households, in that they paid for essential expenditures (rent, utilities, and commutation) during economic hardship. Additionally, children's education expenditures were possibly robust to idiosyncratic income shocks. The results suggest that temporary income is statistically significantly increased if...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled On SDEs with Lipschitz coefficients, driven by continuous, model-free price paths. (arXiv:1807.05692v1 [q-fin.MF])
Using similar assumptions as in Revuz and Yor's book we prove the existence and uniqueness of the solutions of SDEs with Lipschitz coefficients, driven by continuous, model-free price paths. The main tool in our reasonings is a model-free version of the Burkholder-Davis-Gundy inequality for integrals driven by model-free, continuous price paths.
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Optimal Credit Investment and Risk Control for an Insurer with Regime-Switching. (arXiv:1807.05513v1 [q-fin.MF])
This paper studies an optimal investment and risk control problem for an insurer with default contagion and regime-switching. The insurer in our model allocates his/her wealth across multi-name defaultable stocks and a riskless bond under regime-switching risk. Default events have an impact on the distress state of the surviving stocks in the portfolio. The aim of the insurer is to maximize the expected utility of the terminal wealth by selecting optimal investment and risk control strategies. We characterize the optimal trading strategy of defaultable stocks and risk control for the insurer....
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Mean-Variance Efficiency of Optimal Power and Logarithmic Utility Portfolios. (arXiv:1806.08005v2 [q-fin.PM] UPDATED)
We derive new results related to the portfolio choice problem for power and logarithmic utilities. Assuming that the portfolio returns follow a log-normal distribution, the closed-form expressions of the optimal portfolio weights are obtained for both utility functions. Moreover, we prove that both optimal portfolios belong to the set of mean-variance feasible portfolios and establish necessary and sufficient conditions such that they are mean-variance efficient. Furthermore, an application to the stock market is presented and the behavior of the optimal portfolio is discussed for different...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Asset Price Bubbles: An Option-based Indicator. (arXiv:1805.07403v2 [q-fin.PR] UPDATED)
We construct a statistical indicator for the detection of short-term asset price bubbles based on the information content of bid and ask market quotes for plain vanilla put and call options. Our construction makes use of the martingale theory of asset price bubbles and the fact that such scenarios where the price for an asset exceeds its fundamental value can in principle be detected by analysis of the asymptotic behavior of the implied volatility surface. For extrapolating this implied volatility, we choose the SABR model, mainly because of its decent fit to real option market quotes for a...
7 hours ago
The Reformed Broker wrote a new blog post titled Clips From Today’s Halftime Report
 Trump-Putin meeting: Will there be an impact on the stock market? from CNBC. KBW: time to buy beaten up Wells Fargo from CNBC. Transports, tech and Dunkin Brands in the Blitz from CNBC. PNC, Bank of America, Qorvo & JPMorgan from CNBC....
9 hours ago
All About Alpha wrote a new blog post titled Chain Blockers
By Bill Kelly, CEO, CAIA Association The base case for distributed ledger technology (or DLT, and often used interchangeably with blockchain) is to create a trusted network of participants where there is just one ledger of account records shared by all and there is no central recordkeeper. Transactions are digitalRead More
17 hours ago