arXiv research

In this paper we consider the pricing of variable annuities (VAs) with guaranteed minimum withdrawal benefits. We consider two pricing approaches, the classical risk-neutral approach and the benchmark approach, and we examine the associated static and optimal behaviors of both the investor and insurer. The first model …

Developed Merton's model for public companies using observed liabilities.

Value adjustment of uncollateralized trades is determined within a risk-neutral pricing framework. When hedging such trades, investors cannot freely trade protection on their own name, thus facing an incomplete market. This fact is reflected in the non-uniqueness of the pricing measure, which is only constrained by the…

This paper highlights the role of risk neutral investors in generating endogenous bubbles in derivatives markets. We find that a market for derivatives, which has all the features of a perfect market except completeness and has some risk neutral investors, can exhibit extreme price movements which represent a violation…

Study analyzes bond traders' views on equity market dynamics.

We study the formation of derivative prices in equilibrium between risk-neutral agents with heterogeneous beliefs about the dynamics of the underlying. Under the condition that the derivative cannot be shorted, we prove the existence of a unique equilibrium price and show that it incorporates the speculative value of p…

Quantum Portfolios of quantum algorithms encoded on qbits have recently been reported. In this paper a discussion of the continuous variables version of quantum portfolios is presented. A risk neutral valuation model for options dependent on the measured values of the observables, analogous to the traditional Black-Sch…

Enhanced Gordon growth model for valuing financial products.

This paper proposes a paradigm shift in the valuation of long term annuities, away from classical no-arbitrage valuation towards valuation under the real world probability measure. Furthermore, we apply this valuation method to two examples of annuity products, one having annual payments linked to a mortality index and…

Optimizes risk-neutral probabilities for derivative pricing.

In this work, we study the value of an Asian option in the case of exponential Levy markets. More specifically, we are interested in the NIG (normal inverse Gaussian) the VG (variance gamma) models. The exponential Levy models produce incomplete markets. There are therefore an infinite number of equivalent martingale m…

The paper shows how to calculate risk-neutral default probabilities from bid and ask CDS quotes.

Simulates risk-neutral markets using neural spline flows.

This paper introduces an intermediary between conditional expectation and conditional sublinear expectation, called R-conditioning. The R-conditioning of a random-vector in $L^2$ is defined as the best $L^2$-estimate, given a $σ$-subalgebra and a degree of model uncertainty. When the random vector represents the payoff…

We develop a framework for interacting with uncertain environments in reinforcement learning (RL) by leveraging preferences in the form of utility functions. We claim that there is value in considering different risk measures during learning. In this framework, the preference for risk can be tuned by variation of the p…

Generative model uses DDPMs for risk-neutral derivative pricing.

Method determines asset prices in incomplete markets to optimize portfolios.

The importance of counterparty credit risk to the derivative contracts was demonstrated consistently throughout the financial crisis of 2008. Accurate valuation of Credit value adjustment (CVA) is essential to reflect the economic values of these risks. In the present article, we reviewed several different approaches f…

Project estimates risk-neutral dependence from option prices.

In a discrete-time financial market, a generalized duality is established for model-free superhedging, given marginal distributions of the underlying asset. Contrary to prior studies, we do not require contingent claims to be upper semicontinuous, allowing for upper semi-analytic ones. The generalized duality stipulate…

Generative model prices options and extracts risk-neutral densities.

The paper introduces a new short rate model with memory components.

In the hypothesis of rare loss events, the general expression of the policy value has been determined as a functional of the "expected frequency / loss severity" function and of the retention function. Exponential disutility has been chosen after mathematical characterization of some of its economical aspects, where fu…

This study compares direct and indirect methods for estimating own funds in life insurance, finding indirect methods more effective under realistic asset-liability coupling.

Deep Hedging learns risk-neutral vol dynamics for option pricing.

This study deals with the problem of pricing compound options when the underlying asset follows a mixed fractional Brownian motion with jumps. An analytic formula for compound options is derived under the risk neutral measure. Then, these results are applied to value extendible options. Moreover, some special cases of …

The paper models and prices cyber insurance risks, distinguishing idiosyncratic, systematic, and systemic risks.

We study the pricing of credit derivatives with asymmetric information. The managers have complete information on the value process of the firm and on the default threshold, while the investors on the market have only partial observations, especially about the default threshold. Different information structures are dis…

Proposes a method to construct risk-neutral marginals from arbitrage-free option prices.

Develops Merton's model for private companies using DDM.

This paper is a continuation of Ishitani and Kato (2015), in which we derived a continuous-time value function corresponding to an optimal execution problem with uncertain market impact as the limit of a discrete-time value function. Here, we investigate some properties of the derived value function. In particular, we …

Develops a binary tree model for option pricing with skew dynamics.

The risk-neutral option pricing method under GARCH intensity model is examined. The GARCH intensity model incorporates the characteristics of financial return series such as volatility clustering, leverage effect and conditional asymmetry. The GARCH intensity option pricing model has flexibility in changing the volatil…

The paper bounds payoffs and option prices in discrete models.

Paper introduces benchmark-neutral pricing for long-term contracts.

We study an optimal execution problem in a continuous-time market model that considers market impact. We formulate the problem as a stochastic control problem and investigate properties of the corresponding value function. We find that right-continuity at the time origin is associated with the strength of market impact…

A new method calculates implied volatilities without using option prices.

Regulations impose idiosyncratic capital and funding costs for holding derivatives. Capital requirements are costly because derivatives desks are risky businesses; funding is costly in part because regulations increase the minimum funding tenor. Idiosyncratic costs mean no single measure makes derivatives martingales f…

Trading strategy mimics optimal control with simple heuristic.

We propose a continuous-time model of trading with heterogeneous beliefs. Risk-neutral agents face quadratic costs-of-carry on positions and thus their marginal valuations decrease with the size of their position, as it would be the case for risk-averse agents. In the equilibrium models of heterogeneous beliefs that fo…

Bayesian Robust Optimization for Imitation Learning (BROIL) balances risk and reward.

Framework improves risk neutral density estimation in illiquid markets.

New method recovers BSDE from financial data without ergodicity.

This paper surveys options pricing under arithmetic Brownian motion and derives formulas for various types of options.

Trading strategy advantage based on information asymmetry.

We study the price-setting problem of market makers under risk neutrality and perfect competition in continuous time. Thereby we follow the classic Glosten-Milgrom model that defines bid and ask prices as expectations of a true value of the asset given the market makers' partial information that includes the customers …

We develop an entropic framework to model the dynamics of stocks and European Options. Entropic inference is an inductive inference framework equipped with proper tools to handle situations where incomplete information is available. The objective of the paper is to lay down an alternative framework for modeling dynamic…

This paper gives an arbitrage-free prediction for future prices of an arbitrary co-terminal set of options with a given maturity, based on the observed time series of these option prices. The statistical analysis of such a multi-dimensional time series of option prices corresponding to $n$ strikes (with $n$ large, e.g.…