Presenting
Posters June 23

Presenting
Poster June 24

24
Konstantinides, Dimitrios University of
the Aegean
27 Lee, Hyo Seob KAIST Business School
42 Zhao, Hongbiao London School of Economics
44 He, Tony University of Technology,
Sydney
44 Shi, Lei University of Technology,
Sydney
47 Song, Qingshuo City University of Hong
Kong
50 Jessen, Cathrine Copenhagen Business
School
82 Koos, Birgit University of Bonn
93 Goldammer, Verena Vienna University
of Technology
143 Callegaro, Giorgia Université
d'Evry
146 Walker, Michael University of Toronto
147 Li, Jing University of Bonn
153 Kim, Kyu Yoon Yonsei University
156 Zhang, Kai University of Warwick
157 Jonen, Christian University of Cologne
158 Xing, Hao Boston University
180 Loebnitz, Kolja University of Twente
183 Goetz, Barbara TU Muenchen
184 Sadefo Kamdem, Jules Université
de Montpellier 1  UFR d'économie
140
Kato, Takashi Mitsubishi UFJ Trust Investment Technology
Institute Co., Ltd
(unable to attend).

186
Wei, Xiangwei Chinese University of Hong
Kong
225 Li, Duan Chinese University of Hong
Kong
233 Peng, Xiaohu University of Western
Ontario
261 BroniMensah, Edwin University of
Manchester
301 Kenyon, Chris DEPFA Bank Plc.
315 Wopperer, Christoph University of
Ulm
332 Wojakowski, Rafal Lancaster University
356 Lim, Byung Hwa KAIST
360 Oh, Gabjin Chosun University
367 Uratani, Tadashi Hosei University
369 Muromachi, Yukio Tokyo Metropolitan
University
382 Possamaï, Dylan Ecole Polytechnique
397 Kunz, Andreas MunichRE
407 Ferrando, Sebastian/Olivares, Pablo
Ryerson University
415 Cerny, Ales Cass Business School
429 Hanzon, Bernard University College
Cork
436 Hägnesten, Stefan Lund University
447 Kim, HwaSung Kyung Hee University
459 Eisenberg, Larry New Jersey Institute
of
Technology
469 Valov, Angel Scotiabank

Poster Number 24
Konstantinides, Dimitrios, (University of the Aegean)
Coauthors, Konstantinides D. G., Kountzakis C. E.
Risk measures in ordered normed linear spaces with nonempty
coneinterior
In this paper, we use tools from the theory of partially ordered
normed linear spaces, especially the bases of cones. This work extends
the wellknown results for convex and coherent risk measures. Its
linchpin consists in the replacement of the riskless bond by some
interior point in the cone of the space of risks, which stands as
the alternative numeraire.
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Poster Number 27
Lee, Hyo Seob, (KAIST Business School)
Coauthors, Hyo Seob Lee, Tong Suk Kim
Robust Portfolio Choice with External Habit Formation and
Equilibrium Asset Prices
This paper examines optimal consumption and portfolio choice for
the agent concerned about a worstcase scenario with respect to
external habit formation. We theoretically derive the countercyclical
uncertainty aversion, which is disentangled from the risk aversion.
The better the economy, the lower the uncertainty aversion. We obtain
both the Lucas style equilibrium asset price and riskfree rate,
and we provide more plausible parameter choices to explain both
the equity premium puzzle and the low riskfree rate puzzle.
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Poster Number 42
Zhao, Hongbiao, (London School of Economics)
Coauthors, Angelos Dassios and Hongbiao Zhao
Point Processes with Contagion and an Application to Credit
Risk
We introduce a new point process, the dynamic contagion process,
by generalising the Hawkes process and the Cox process with shot
noise. Our process includes self excited and externally excited
jumps, which can be used to model the dynamic contagion impact from
endogenous and exogenous factors. The analytic expressions of the
Laplace transform of the intensity process and probability generating
function of the point process have been derived. The object of this
study is to produce a general mathematical framework for modelling
the dependence structure of arriving events, which has the potential
to be applicable to a variety of problems in finance. We provide
an application to credit risk, and the simulation algorithm for
industrial implementation.
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Poster Number 44
Shi, Lei (He, Tony), (University of Technology, Sydney)
Coauthors, XueZhong He, Lei Shi
Difference in Opinions and Risk Premium
When people agree to disagree, this paper examines the impact of
the disagreement among agents on market equilibrium and equity premium.
Within the standard mean variance framework, we consider a market
of two risky assets, a riskless asset and two (and then a continuum
of) agents who have different preferences and heterogeneous beliefs
in the means and variance/covariances of the asset returns. By constructing
a consensus belief, we introduce a boundedly rational equilibrium
(BRE) to characterize the market equilibrium and derive a CAPM under
heterogeneous beliefs. When the differences in opinion are formed
as meanpreserving spreads of a benchmark homogeneous belief, we
analyze explicitly the impact on the market equilibrium and risk
premium, showing that the risk tolerance, optimism/pessimism and
confidence/doubt can jointly generate high risk premium and low
riskfree rate.
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Poster Number 47
Song, Qingshuo, (City University of Hong Kong)
Coauthors, Erhan Bayraktar, Qingshuo Song, and Jie Yang
On The Continuity of Stochastic Exit Time Control Problems
In general one can show that the value function is a viscosity solution
of a fully nonlinear HamiltonJacobiBellman equation given that
it is a continuous function. However, when the domain is bounded,
it is not always the case that the value function is continuous
due to tangency problem. A sufficient condition for the continuity
of the value function is provided in Theorem 5.2.1 in Fleming and
Soner (2006) for the continuity of the value functions. In this
paper we improve this condition using a probabilistic argument by
observing the sample path behavior of the controlled processes.
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Poster Number 50
Jessen, Cathrine, (Copenhagen Business School)
Coauthors, Cathrine Jessen and Rolf Poulsen
Empirical Performance of Models for Barrier Option Valuation
The empirical performance of five models for barrier option valuation
is investigated: BlackScholes, the constant elasticity of variance,
Heston's stochastic volatility, Merton's jumpdiffusion, and the
Variance Gamma models. We use timeseries data from the USD/EUR
exchange rate market. The models are calibrated to plain vanilla
option prices, and prediction errors at different horizons for plain
vanilla and barrier options are investigated. For plain vanilla
options, the Heston and Merton models have similar and superior
performance for prediction horizons up to one week. For barrier
options, the continuouspath models do almost equally well, while
both models with jumps perform markedly worse.
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Poster Number 82
Koos, Birgit, (University of Bonn)
Coauthors, Dirk Broeders, An Chen
A utilitybased comparison of pension funds and life insurance
companies under regulatory constraints
This paper compares two diff erent types of annuity providers, i.e.
defined benefi t pension funds and life insurance companies. It
employs a contingent claim approach to evaluate the risk return
tradeoff for annuitants. For that, we take into account the differences
in contract speci fications and in regulatory regimes. Meanvarianceskewness
analysis is conducted to determine annuity choices of consumers.
We calibrate the regulatory default probabilities such that the
consumer is indi fferent between a pension fund and a life insurer.
The consumer's risk aversion level appears to play a crucial rule
in this.
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Poster Number 93
Goldammer, Verena, (Vienna University of Technology)
Coauthors, Verena Goldammer
Modeling and Estimation of Dependent Credit Rating Transitions
Simultaneous defaults in large portfolios of credit derivatives
can induce huge losses. To take this into account, we model the
credit rating transitions of firms by an interacting particle system
that allows the firms to change their credit rating at the same
time. We provide a general model, where all firms may change their
credit rating simultaneously and then restrict the possible transitions.
Simulation results demonstrate the influence of dependence between
the firms. To estimate the parameters the maximum likelihood function
is provided for the general model. In case of the strongly coupled
random walk we state the maximum likelihood estimators and show
consistency and asymptotic normality.
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Poster Number 140
Kato, Takashi, (Mitsubishi UFJ Trust Investment Technology Institute
Co., Ltd.)
Coauthors, Takashi Kato
How to Model and Measure Market Impact
We study an optimal execution problem in consideration of market
impact. To formulate a mathematical model, we derive a continuoustime
model as a limit of discretetime models. We study some properties
of its value function, especially a characterization as a viscosity
solution of HJB. Next we consider a case where essential effects
of market impact appear. We show that a trader should execute gradually
when a market impact function is nonlinear or there is price recovery
effect of a security. In these cases, we see that total market impact
cost induced by an optimal execution policy is concave.
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Poster Number 143
Callegaro, Giorgia, (Université d'Evry)
Coauthors, Giorgia Callegaro
Optimal consumption problems in discontinuous markets
We study an extension of Merton's classical portfolio optimization
problem to a particular case of discontinuous market, with a single
jump. The market consists of a nonrisky asset, a "standard risky"
asset and a risky asset with discontinuous price dynamics. We consider
three different problems of maximization of the expected utility
from consumption, in the cases when the investment horizon is fixed,
finite (but possibly uncertain) and infinite. We solve the problems
by means of a direct approach and of the Dynamic Programming Principle.
In the logarithmic, power and exponential utility cases, we compare
the obtained explicit solutions.
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Poster Number 146
Walker, Michael, (University of Toronto)
Coauthors, Michael B Walker
Hedging and Valuation of Seasoned CDSs: a Numerical Example
Seasoned CDS contracts can not, in general, be perfectly hedged
using CDSs from the current CDS market. Such contracts are often
approximately hedged in terms of a single CDS from the market. (This
hedge will be called a vanilla hedge.) The first contribution of
this poster is to demonstrate by a numerical example how an appropriately
chosen multiCDS hedge (made up of CDSs from the market of several
different maturities) can give the hedger a net position with a
lower risk than that achieved with the vanilla hedge. Seasoned CDSs
are commonly valued in terms of a procedure designed for complete
markets, and based on a riskneutral measure uniquely determined
by a calibration process; this procedure does not take into account
the cost of hedging, the fact that the risk of the hedged position
has an impact on its value, or the fact that the CDS market is in
reality incomplete. The second contribution of this report is to
take the point of view of a dealer taking over an investor's illiquid
seasoned CDS position, and to show by an example how to establish
gooddeal bid and ask prices for the seasoned CDS using an incompletemarket
approach. This approach supposes that the dealer will require to
make a minimum expected profit, which must be positive, in order
to agree to the deal.
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Poster Number 147
Li, Jing, (University of Bonn)
Coauthors, Jing Li, Alexander Szimayer
The Uncertain Force of Mortality Framework: Pricing UnitLinked
Life Insurance Contracts
Unitlinked life insurance contracts link the financial market and
the insurance market together. In a complete and arbitragefree
financial market, financial risk can be hedged perfectly, but perfect
hedging is not possible when mortality risk is embedded in a financial
product. For many years, this problem was ignored by assuming that
the force of mortality is deterministic. Under this assumption,
an insurance company can hedge against mortality risk by pooling
a large number of policyholders together. It then only needs to
deal with the financial risk. However, in recent years it has been
acknowledged that the force of mortality is actually stochastic
and researchers have tried to model this stochastic process. The
drawback of this procedure is that it cannot provide a nearly perfect
hedge against mortality risk unless a large number of mortalitylinked
financial products are liquidly traded. In contrast to specifying
a stochastic model for the force of mortality, we provide a framework
where the force of mortality is uncertain but stays within lower
and upper bounds. Within this framework, we obtain upper and lower
price bounds for Europeanstyle unitlinked life insurance contracts
by applying optimal control theory and PDE methods. In particular,
the upper and lower price bounds are obtained by seeking out the
worst and best scenarios for varying forces of mortality. The PDE
formulation of the pricing problem is solved with finite difference
methods. The upper and lower price bounds enable us to enhance hedging
strategies and reduce exposure to financial and mortality risks.
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Poster Number 153
Kim, Kyu Yoon, (Yonsei University)
Coauthors, KyuYoon Kim, JeongHoon KIm, SoYoung Sohn, WonSang
Lee
Real options under the CEV Diffusion with Stochastic Volatility
As empirical tests on finacial option has shown the nonconstant
features of the implied volatility, an extension to the real option
needs a same analysis with different financial circumstances. Here,
we consider a real option pricing model with stochastic volatility
for the first time, and a goal of this research is providing CEV
diffusion with stochastic volatility(SVCEV) into the real option
especially for Technology Financing. Furthermore, an empirical test
with dicrete annual Technology Financing Data is examined with interesting
analogies.
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Poster Number 156
Zhang, Kai, (University of Warwick)
Coauthors, Kai Zhang
Weak and Strong Numerical Schemes for the LIBOR Market Model
in the Terminal Measure
This paper investigates the convergence properties of various methods
for drift approximation in the LIBOR market model in the terminal
measure. The methods we consider are ItoTaylor schemes and strong
Taylor approximations based on perturbed stochastic differential
equations. We propose an improvement of the latter. The pricing
errors of various methods are compared in both single and multiple
step cases. We criticize that the strong Taylor approximation approaches
do not converge as the number of time steps increases and therefore
should not be used for discretization.
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Poster Number 157
Jonen, Christian, (University of Cologne)
Coauthors, Christian Jonen
A Robust Regression Monte Carlo Method for Pricing HighDimensional
AmericanStyle Options
We present a new regressionbased Monte Carlo method for pricing
multiasset Americanstyle options. The key idea is to fit the model
function for the continuation value at every exercise date by robust
regression rather than least squares. Furthermore, we suggest a
new technique for calculating the coefficients of the model function
to decrease the number of basis functions and to enable the parallelization
of our approach. In addition, we extend earlier results for variance
reduction via importance sampling for Americanstyle options. In
comparison to existing Monte Carlo methods, we can improve convergence
significantly by implementing our proposed approaches.
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Poster Number 158
Xing, Hao, (Boston University)
Coauthors, Erhan Bayraktar, Constantinos Kardaras, and Hao Xing
Valuation equations for stochastic volatility models
We study the valuation partial differential equation for European
contingent claims in a general framework of stochastic volatility
models. The standard FeynmanKac theorem cannot be directly applied
because the diffusion coefficients may degenerate on the boundaries
of the state space and grow faster than linearly. We allow for various
types of model behavior; for example, the volatility process in
our model can potentially reach zero and either stay there or instantaneously
reflect, and assetprice processes may be strict local martingales
under a given riskneutral measure. Our main result is an extension
of the standard FeynmanKac theorem in the context of stochastic
volatility models. Sharp results on the existence and uniqueness
of classical solutions to the valuation equation are obtained using
a combination of probabilistic and analytical techniques. The role
of boundary conditions is also discussed.
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Poster Number 180
Loebnitz, Kolja, (University of Twente)
Coauthors, Kolja Loebnitz and Berend Roorda
A simple framework to adjust EC and RAROC for liquidity risk
Banks can default because of illiquidity, despite being technically
solvent and having adequate capital. However, regulators and banks
have focused primarily on measuring and managing solvency risk,
not liquidity risk. We introduce a nonlinear value deflator that
allows banks to adjust their Economic Capital and RAROC for a combination
of market liquidity risk and funding risk. We go on to examine the
problem of allocating the overall liquidityadjusted EC and RAROC
to business units. Finally, we show that, under moderate assumptions,
coherent liquidity adjusted risk measures are convex, positively
scalesupervariant, and cashequity translational subvariant in
asset liability pairs.
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Poster Number 183
Goetz,Barbara , (TU Muenchen)
Coauthors, Barbara Goetz, Marcos Escobar, Rudi Zagst
Two assetbarrier option within stochastic volatility models.
Financial products which depend on hitting times for two underlying
assets have become very popular in the last years, for example doubledigital
barrier options, twoasset barrier spread options and double lookback
options. Analytical expressions of the joint distribution of the
maximum and/or minimum values of two assets have been derived by
He et al. (1998) and Zhou (1997, 2001) leading to closedform pricing
of those derivatives in the context of constant volatility and correlation.
The financial crisis has shown that constant covariances are an
assumption which is not valid. Thus, we introduce a third stochastic
factor to the geometric Brownian model governing the covariance
and derive closedform expressions for some twoasset barrier options.
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Poster Number 184
Sadefo Kamdem, Jules (Université de Montpellier 1
 UFR d'économie)
Businesses Risks Agregation With Copula
This paper provides explicit expression for the lower bound
and the upper bound of the overall VaR of a portfolio of business
units when the joint risks factors of each business unit follows
a mixture of multivariate elliptic distributions with dynamic conditional
correlation matrix. We use copula to measure the dependance between
the prots and losses (P&Ls) of dierent
business units in the portfolio.
Poster Number 186
Wei, Xiangwei, (The Chinese University of Hong Kong)
Coauthors, Ning Cai, Nan Chen, Xiangwei Wan
Pricing and Hedging OccupationTimeRelated Options
In this paper, we provide Laplace transformbased analytical solutions
to pricing problems of various occupationtimerelated derivatives
such as step options, corridor options, and quantile options under
Kou's doubleexponential jump diffusion model. These transforms
can be inverted numerically via the Euler Laplace inversion algorithm,
and the numerical results illustrate that our pricing methods are
accurate and efficient. The analytical solutions can be obtained
primarily because we derive the closedform Laplace transform of
the joint distribution of the occupation time and the terminal value
of the doubleexponential jump diffusion process.
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Poster Number 225
Li, Duan, (The Chinese University of Hong Kong)
Coauthors, Duan Li, Xiangyu Cui and Jiaan Yan
Classical Mean Variance Model Revisited: Pseudo Efficiency
Almost all literatures on meanvariance portfolio selection adhere
their investigation to a binding budget spending assumption. In
the meanvariance world for a market of all risky assets, however,
the common belief of monotonicity does not hold, i.e., not the larger
the funding level, the better the outcome. We introduce in this
paper the concept of pseudo efficiency to remove from the candidates
such efficient meanvariance policies which can be achieved by less
initial investment level. By relaxing the binding budget spending
restriction in investment, we derive an optimal scheme in managing
initial wealth which dominates the traditional meanvariance efficient
frontier.
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Poster Number 233
Peng, Xiaohu, (University of Western Ontario)
Coauthors, Xiaohu Peng, Tyson Whitehead, Mark Reesor
Pricing and Optimal Management of a Retail Debt Portfolio
Often retail debt products are priced and sold before they are issued
to individual investors. This sales strategy makes pricing and management
of the retail debt portfolio interesting. In this paper we present
a general simulation framework in which one can account for this
pricecommitment risk and define objective functions suitable for
the seller. Retail debt products having embedded features similar
to Canada Savings Bonds are considered. A pricing methodology using
leastsquares Monte Carlo is developed for these bonds. Examples
are presented showing the optimal initial coupon (bond price) for
three different objective functions that sellers may consider for
this type of sales strategy.
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Poster Number 261
BroniMensah, Edwin, (University of Manchester)
Coauthors, Edwin K. BroniMensah, Peter W. Duck, David P. Newton
A simple and generic methodology to suppress `Nonlinearity'
error in latticebased option pricing
We propose and develop a generic methodology for overcoming `nonlinearity'
errors often found in latticebased option pricing. The approach
can readily be applied to a broad class of numerical schemes to
improve convergence, including binomial trees, quadrature and nitedi
erence schemes. The methodology, which utilises the leastsquares
method on raw output data, is powerful, as it overcomes nonmonotonic
convergence behaviour that is present due to the misalignment of
node points. The methodology enables extrapolation techniques to
be employed on nonmonotonic data sets, is equally applicable to
pricing options with early exercise features, and produces signi
cant improvements in accuracy.
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Poster Number 301
Kenyon, Chris, (DEPFA Bank Plc.)
Coauthors, Donal Gallagher, James P. Gleeson, Chris Kenyon, Roland
Lichters
Valuation of a Cashflow CDO Without Monte Carlo Simulation
Unlike tranches of synthetic CDOs, that depend only on defaults
of underlying securities, tranches of cashflow CDOs also depend
on interest cash flows from coupons. Whilst fast, accurate, (semi)analytic
methods exist for pricing synthetic CDO tranches, no equivalent
methods exist for pricing cashflow CDO tranches because of their
dependence on both principal and interest waterfalls. We introduce
an analytical approximation that renders cashflow CDOs amenable
to (semi)analytic pricing. The complication of needing the joint
distribution of interest and outstanding notional is reduced to
needing only marginal distributions. We show that our analytic approximation
is globally valid with bounded errors.
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Poster Number 315
Wopperer, Christoph, (University of Ulm)
Coauthors, Christoph Wopperer
Robust portfolio optimization for HARAutility and stochastic
coefficients by BSDEs
Continuoustime portfolio optimization problems with stochastic
coefficients are treated by BSDE techniques among others in Hu,
Imkeller and Müller (2005), Lim and Quenez (2008) and Ferland and
Watier (2008). Here we consider robust consumptioninvestment problems
with uncertain drift process under general HARAutility and stochastic
coefficients. From the martingale optimality principle we derive
a stochastic HamiltonJacobiBellman equation for the robust optimal
value function. Using a separation ansatz, we obtain a linear BSDE
for the robust optimal value function and compute a robust optimal
policy. Moreover, we present explicit solutions for logarithmic
and exponential utility. The main mathematical tools are BSDEs.
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Poster Number 332
Wojakowski, Rafal, (Lancaster University)
Coauthors, M. Shahid Ebrahim, Mark B. Shackleton, Rafal M. Wojakowski
On Pricing Continuous Workout Mortgages
This paper offers a method to reduce vulnerability of the financial
architecture to banking crisis by employing Continuous Workout Mortgages
(CWMs). CWMs enable the financial system to absorb shocks better
than the rigid plain vanilla Fixed Rate Mortgages, Adjustable Rate
Mortgages (ARMs) and their hybrids. We model CWMs by employing a
marketobservable variable such as the house price index of the
pertaining locality. Our main results include: (a) explicit modelling
of repayment and interestonly CWMs; (b) closed form formulae for
mortgage payment and mortgage balance of a repayment CWM; (c) a
closed form formula for the actuarially fair mortgage rate of an
interestonly CWM. For repayment CWMs we extend our analysis to
include two negotiable parameters: adjustable "workout proportion"
and adjustable "workout threshold." These results are of importance
as they not only help understanding the mechanics of CWMs and estimating
key contract parameters. Our results also provide guidance on how
to enhance the resilience of the financial architecture and mitigate
systemic risk.
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Poster Number 356
Lim, Byung Hwa, (KAIST)
Coauthors, BongGyu Jang
Robust Portfolio Rules with a New State Variable
In the paper, we solve a robust control problem in the line of Gilboa
and Schmeidler [Gilboa, I., and D. Schmeidler, 1989, Maxmin expected
utility with nonunique prior, Journal of Mathematical Economics
18, 141153]'s work. By using a continuation entropy as a new state
variable, we convert the constraint robust control problem in Hansen
and Sargent [Hansen, L.P., and T.J. Sargent, 2001, Robust control
and model uncertainty, American Economic Review 91, 6066] into
a robust control problem which can be interpreted as a two player
zerosum game. Under the problem setup, we show that the BellmanIsaacs
condition is satisfied, thus the time inconsistency issue is not
a trouble any more. We find the optimal consumption and portfolio
strategies of an individual with a CRRA utility, which can give
an alternative explanation for the famous underdiversification
puzzle and equity premium puzzle.
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Poster Number 360
Oh, Gabjin, (Chosun University)
Coauthors, Gabjin Oh, Jaewook Lee
The nonlinear and statistical properties of the implied volatility
for index option
In this paper, we analyze the statistical and nonlinear properties
of the logvariations in implied volatility for CAC40, DAX, S&P500
daily index options. The price of index option is generally represented
by its implied volatility surface, existing the smile and skew properties.
We utilize the Levy process as underlying asset in order to understand
an intrinsic property of implied volatility in the index options
and estimate the implied volatility surface. We have found that
the option pricing models used in this paper can produce the smile
or sneer features of implied volatility observed in the real option
markets. We study the variation of implied volatility for atthemoney
index call and put options and find that its distribution function
follows a powerlaw behavior with an exponent within 3.5 < gamma
<4.5. In particular, the variation of implied volatility show multifractal
spectrum characteristics for all data sets used.
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Poster Number 367
Uratani, Tadashi, (Hosei University)
Coauthors, Tadashi Uratani
Lifetime Ruin, Consumption and Annuity
We study the selfannuitization and the dynamic optimal portfolio
selection to minimize the probability of lifetime ruin. To avoid
the risk of living after spending out his wealth, there are three
financial instruments, a risky asset like corporate stock, risk
free asset like bank account, and annuity which guarantee fixed
income until death. As a retiree is getting older, the annuity price
is becoming cheaper to purchase it. The problem is to find the optimal
portfolio of three financial assets and the timing to buy annuity.
Bayraktar solved the problem by borrowing constraint or by introducing
borrowing rate. The optimal solution is holding only the risky asset
afterwards his wealth equals to the risky investment. When we take
an annuity into portfolio on these setting, it is generally difficult
to solve it. Because the price of annuity depends on his remaining
year of life. We assume firstly that consumption plan is based on
the optimal investment policy of Bayraktar,and secondly that the
annuity price is exponentially decreasing. We obtain the optimal
portfolio strategy and the average timing to purchase annuity by
Laplace transform.
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Poster Number 369
Muromachi, Yukio, (Tokyo Metropolitan University)
Coauthors, An application of the implied copula model to the risk
evaluation of a portfolio
Yukio Muromachi
We propose a simple application of the implied copula model, proposed
by Hull and White (2006), to the risk evaluation of a portfolio.
In the implied copula model, the hazard rates of the entities have
a distribution, and the default times are conditionally independent.
Additionally we assume that the normalized hazard rates under the
risk neutral probability measure and the physical measure have the
same distribution. Then, the risk calculated by our model can reflect
the latent fear of the major market participants. We will show a
practical and simple example.
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Poster Number 382
Possamaï, Dylan, (Ecole Polytechnique)
Coauthors, Umut Cetin, Dylan Possamaï, Mete Soner and Nizar Touzi
Large Liquidity Expansion of the superhedging costs
We consider a financial market with liquidity cost as in \c{C}etin,
Jarrow and Protter where the supply function $\mathbf{S}^\eps(s,\nu)$
depends on a parameter $\eps\ge 0$ with $\mathbf{S}^0(s,\nu)$ corresponding
to the perfect liquid situation. Using the PDE characterization
of \c{C}etin, Soner and Touzi, we provide a Taylor expansion of
the superhedging price in powers of $\eps$. In particular, we explicitly
compute the first term in the expansion for a Call option and give
bounds for the order of the expansion for a Digital Option, pointing
out a subtle change of regime for discontinuous payoffs.
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Poster Number 397
Kunz, Andreas, (MunichRE)
Coauthors, Andreas Kunz, Lothar Kruppok
Valuation and Hedging of WithProfit Insurance Policies with
Interest Rate Guarantees
We analyze a withprofit life insurance product of universal life
type with a bonus contribution mechanism that is indexed to interest
rates in the following way: the crediting rate is floored by a guaranteed
rate; to allow for outperformance in case of rising interest rates,
it is indexed to the average of observed longterm interest rates.
Financially rational surrender behavior of policy holders is explicitly
taken into account. We will analyze the capital market sensitivities
of the crediting mechanism using the LIBOR market interest rate
model and derive a hedging strategy. We find that the constant maturity
swap feature dominates the crediting rate mechanism. A hedging strategy
for this product would use interest rate swaptions to match the
nonlinear profile and the volatility exposure. This shows that
the naive investment strategy motivated from an accounting point
of view, would lead to completely wrong hedging results.
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Poster Number 407
Ferrando, Sebastian (Olivares, Pablo), (Ryerson University)
Coauthors, Alexander Alvarez, Sebastian Ferrando, Pablo Olivares
NonProbabilistic Hedging and Pricing. Applications to Probabilistic
Models
The paper studies several aspects of a nonprobabilistic approach
to hedging and pricing. In order to illustrate some of the differences
with the classical probabilistic approach, we use our setup to derive
new hedging and pricing results in probabilistic models. Besides
dealing with classes of continuous paths, we also incorporate jumps;
for some of our deterministic classes this leads to incompleteness
and, in order to achieve perfect replication of options in such
a setting, we allow hedging with options to take place. In this
setup, our results provide a pathwise and discrete approach, with
explicit expressions for the hedging portfolio, to a result of Mancini
on perfect hedging with European calls in a PoissonGaussian model.
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Poster Number 415
Cerny, Ales, (Cass Business School)
Coauthors, Sara Biagini and Ales Cerny
Admissible Strategies in Semimartingale Portfolio Optimization
The choice of admissible trading strategies in mathematical modeling
of financial markets is a delicate issue. We propose a novel notion
of admissibility that has many pleasant features: admissibility
is characterized purely under the objective measure; each admissible
strategy can be approximated by simple strategies; the wealth of
any admissible strategy is a supermartingale under all pricing measures;
local boundedness of the price process is not required. For utility
functions finite on the real line our class represents a minimal
set containing simple strategies which also contains the optimizer,
under conditions that are milder than the celebrated reasonable
asymptotic elasticity condition on the utility function.
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Poster Number 429
Hanzon, Bernard, (University College Cork)
Coauthors, Bernard Hanzon and Finbarr Holland
Nonnegativity of exponential polynomials and EPT functions
The class of exponentialpolynomialtrigonometric (EPT) functions
is the class of functions that appear as a solution to some linear
differential equation with constant coefficients; here we consider
these functions on [0, infinity). Examples are the exponential functions,
the polynomials and sin(t) and cos(t). We consider the question
how to determine whether such a function is nonnegative on a given
finite interval [0,T]. We solve this by presenting a socalled generalized
BudanFourier sequence for any given EPT function. Using this the
number of signchanging zeros of the function can be determined.
As an application we present a parametrization of all nonnegative
NelsonSiegel forward rate curves.
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Poster Number 436
Hägnesten, Stefan, (Lund University)
Coauthors, Stefan Hägnesten, MSc., Jimmy Olsson, PhD, Assistant
professor
Optionbased Maximum Likelihood Estimation in Stochastic Volatility
Models
In this note we apply the particlebased iterated filtering algorithm
proposed by Ionides et al. (2009) to the problem of calibration
of stochastic volatility models. We assume that the underlying asset
follows the Heston stochastic volatility dynamics and consider a
hidden Markov model formulation of the observed option prices where
the volatility of the underlying asset is treated as a latent signal.
In this setting, robust approximations of the maximum likelihood
estimator (MLE) are obtained by introducing a time varying parameter
process following a random walk dynamics with decreasing size of
the increments. The technique is demonstrated on simulated data.
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Poster Number 447
Kim, HwaSung, (Kyung Hee University)
Coauthors, Bara Kim and HwaSung Kim
Parabolic approximation method for option pricing and applications
to compound options
This paper provides an efficient and accurate approximation of Europeanstyle
option values. We propose that any payoff of an option is approximated
by a piecewise quadratic function of the underlying asset price.
Our approximation method is applicable easily to European options
with any payoffs as well as under various stochastic process encompassing
the jumpdiffusion and stochastic volatility models.
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Poster Number 459
Eisenberg, Larry, (New Jersey Institute of Technology)
Coauthors, Larry Eisenberg
The short and longerterm consequences of VaR and probabilityofruin
with normal risks
Despite the use of VaR as a means to control risk, VaR regulations
can have the opposite effect. A manager who maximizes his firm's
expected equity value subject to a VaR constraint, when the firm
is in bad financial health, on its constraint pays a premium for
financial instruments that increase his firm's volatility and does
the opposite when the firm is in good financial health. Basel II
regulations encourage banks with greater systemic risk to use VaR
constraints thereby encouraging banks to which the financial system
is most exposed to increase risk when it is most vulnerable. The
firm in bad financial health will pay a premium to increase its
variance, and the firm in good financial health will do the opposite.
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Poster Number 469
Valov, Angel, (Scotiabank)
Coauthors, S. Jaimungal, A. Kreinin, A. Valov
Generalyzed Shiryaev's Embedding and Skorohod Problem
We consider a connection between the famous Skorohod stopping problem
and an inverse problem for the first hitting time distribution for
the Brownian motion: given a probability distribution, F, find a
boundary such that the first hitting time distribution is F. We
show that randomization of the initial state of the process makes
the inverse problem analytically tractable. The idea of randomization
of the initial state allows us to significantly extend the class
of distribution in the case of a linear boundary and helps to establish
connection with the Skorohod stopping problem.
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