Publications

This is an advanced guide to optimal stopping and control, focusing on advanced Monte Carlo simulation and its application to finance. Written for quantitative finance practitioners and researchers in academia, the book looks at the classical simulation based algorithms before introducing some of the new, cutting edge approaches under development.

We introduce a longevity feature to the classical optimal dividend problem by adding a constraint on the time of ruin of the firm. We extend the results in [HJ15], now in context of one-sided Lévy risk models. We consider de Finetti's problem in both scenarios with and without fix transaction costs, e.g. taxes. We also study the constrained analog to the so called Dual model. To characterize the solution to the aforementioned models we introduce the dual problem and show that the complementary slackness conditions are satisfied and therefore there is no duality gap. As a consequence the optimal value function can be obtained as the pointwise infimum of auxiliary value functions indexed by Lagrange multipliers. Finally, we illustrate our findings with a series of numerical examples.

For a probability distribution P on an at most countable alphabet A, this article gives finite sample bounds for the expected occupancy counts EKn,r and probabilities EMn,r. Both upper and lower bounds are given in terms of the counting function ν of P. Special attention is given to the case where ν is bounded by a regularly varying function. In this case, it is shown that our general results lead to an optimal-rate control of the expected occupancy counts and probabilities with explicit constants. Our results are also put in perspective with Turing’s formula and recent concentration bounds to deduce bounds in probability. At the end of the paper, we discuss an extension of the occupancy problem to arbitrary distributions in a metric space.

We guarantee the existence and uniqueness (in the almost everywhere sense) of the solution to a Hamilton-Jacobi-Bellman (HJB) equation with gradient constraint and an integro-differential operator whose Lévy measure has bounded variation. This type of equation arises in singular stochastic control problems where the state process is a jump-diffusion with infinite activity and finite variation jumps. By means of ε-penalized controls we show that the value function associated to this class of problems agrees with the solution to our HJB equation.

In this paper, we consider limit laws for the model, which is a generalisation of the random energy model (REM) to the case when the energy levels have the mixture distribution. More precisely, the distribution of the energy levels is assumed to be a mixture of two normal distributions, one of which is standard normal, while the second has the mean \(\sqrt{n}a\) with some \(a\in \R,\) and the variance \(\sigma \ne 1\). The phase space \((a,\sigma) \subset \R \times \R_+\) is divided onto several domains, where after appropriate normalisation, the partition function converges in law to the stable distribution. These domains are separated by the critical surfaces, corresponding to transitions from the normal distribution to \(\alpha-\)stable with \(\alpha \in (1,2)\), after to 1-stable, and finally to \(\alpha-\)stable with \(\alpha \in (0,1).\) The corresponding phase diagram is the central result of this paper.

The estimation of the diffusion matrix Σ of a high-dimensional, possibly time-changed Levy process is studied, based on discrete observations of the process with a fixed distance. A low-rank condition is imposed on Σ. Applying a spectral approach, we construct a weighted least-squares estimator with nuclear-norm-penalisation. We prove oracle inequalities and derive convergence rates for the diffusion matrix estimator. The convergence rates show a surprising dependency on the rank of Σ and are optimal in the minimax sense for fixed dimensions. Theoretical results are illustrated by a simulation study.

We consider de Finetti's problem for spectrally one-sided Lévy risk models with control strategies that are absolutely continuous with respect to the Lebesgue measure. Furthermore, we consider the version with a constraint on the time of ruin. To characterize the solution to the aforementioned models, we first solve the optimal dividend problem with a terminal value at ruin and show the optimality of threshold strategies. Next, we introduce the dual Lagrangian problem and show that the complementary slackness conditions are satisfied, characterizing the optimal Lagrange multiplier. Finally, we illustrate our findings with a series of numerical examples.

In this work we study the optimal execution problem with multiplicative price impact in algorithm trading, when an agent holds an initial position of shares of a financial asset. The inter-selling-decision times are modelled by the arrival times of a Poisson process. The criterion to be optimised consists in maximising the expected net present value of gains of the agent, and it is proved that an optimal strategy has a barrier form, depending only on the number of shares left and the level of asset price.  

In this paper we propose a novel dual regression-based approach for pricing American options. This approach reduces the complexity of the nested Monte Carlo method and has especially simple form for time discretized diffusion processes. We analyse the complexity of the proposed approach both in the case of fixed and increasing number of exercise dates. The method is illustrated by several numerical examples.

In this paper we study the problem of statistical inference on the parameters of the semiparametric variance-mean mixtures.  This class of mixtures has recently become rather popular in statistical and financial modelling. We design a semiparametric estimation procedure that first estimates the mean of the underlying normal distribution and then recovers nonparametrically the density of the corresponding mixing distribution.  We illustrate the performance  of our procedure on simulated and real data.

In this spaper, our aim is to revisit the nonparametric estimation of a square integrable density f on R, by using projection estimators on a Hermite basis. These estimators are studied from the point of view of their mean integrated squared error on R. A model selection method is described and proved to perform an automatic bias variance compromise. Then, we present another collection of estimators, of deconvolution type, for which we define another model selection strategy. Although the minimax asymptotic rates of these two types of estimators are mainly equivalent, the complexity of the Hermite estimators is usually much lower than the complexity of their deconvolution (or kernel) counterparts. These results are illustrated through a small simulation study.

We consider a new method of semiparametric statistical estimation for the continuous-time moving-average Lévy processes. We derive the convergence rates of the proposed estimators and show that these rates are optimal in minimax sense.

In this paper we suggest a modification of the regression-based variance reduction approach recently proposed in Belomestny et al. This modification is based on the stratification technique and allows for a further significant variance reduction. The performance of the proposed approach is illustrated by several numerical examples.

 

Following a series of works on capital growth investment, we analyse log-optimal portfolios where the return evaluation includes ‘weights’ of different outcomes. The results are twofold: (A) under certain conditions, the logarithmic growth rate leads to a supermartingale, and (B) the optimal (martingale) investment strategy is a proportional betting. We focus on properties of the optimal portfolios and discuss a number of simple examples extending the well-known Kelly betting scheme. An important restriction is that the investment does not exceed the current capital value and allows the trader to cover the worst possible losses. The paper covers a class of discrete-time models. A continuous-time extension will be a topic of a forthcoming study

In this work, we consider optimal stopping problems with conditional convex risk measures.  

 

This note states several results on the exponential functionals of the Brownian motion and their approximations by Markov chains. Starting from M.Yor, such functionals were studied in mathematical finance. At the same time, they play a significant role in different settings: the analysis of diffusions on the class of solvable Lie groups, in particular on the group of (2 X 2) upper triangular matrices, with positive diagonal elements. The discrete random walks cannot properly describe the local structure of diffusion. However, instead of the usual local limit theorem (which is not applicable) its weaker form, namely quasi-local form is given.

A random flight on a plane with non-isotropic displacements at the moments of direction changes is considered. In the case of exponentially distributed flight lengths a Gaussian limit theorem is proved for the position of a particle in the scheme of series when jump lengths and non-isotropic displacements tend to zero. If the flight lengths have a folded Cauchy distribution the limiting distribution of the particle position is a convolution of the circular bivariate Cauchy distribution with a Gaussian law.