Efficient Procedure for Valuing American Lookback Put Options

Lookback option is a well-known path-dependent option where its payoff depends on the historical extremum prices. The thesis focuses on the binomial pricing of the American floating strike lookback put options with payoff at time $t$ (if exercise) characterized by $$\max_{k=0, \ldots, t} S_k - S_t,$$ where $S_t$ denotes the price of the underlying stock at time $t$. Build upon the idea of \hyperlink{RBCV}{Reiner Babbs Cheuk and Vorst} (RBCV, 1992) who proposed a transformed binomial lattice model for efficient pricing of this class of option, this thesis extends and enhances their binomial recursive algorithm by exploiting the additional combinatorial properties of the lattice structure. The proposed algorithm is not only computational efficient but it also significantly reduces the memory constraint. As a result, the proposed algorithm is more than 1000 times faster than the original RBCV algorithm and it can compute a binomial lattice with one million time steps in less than two seconds. This algorithm enables us to extrapolate the limiting (American) option value up to 4 or 5 decimal accuracy in real time

Path-dependent functionals of constant elasticity of variance and related processes distributional results and applications in finance.

The present thesis provides an analysis of some path-dependent functionals of Constant Elasticity of Variance (CEV) processes. More precisely, we study the continuous arithmetic average of the process over time, plain or sometimes multiplied by a knock-out indicator. We start by describing its mathematical properties and provide new distributional results (moments, densities, moment generating function among others). Some of these results also pertain to the joint distribution of the integral and the process itself. The versatility of the process enables us to consider diverse financial applications: fixed and floating strike Asian options on equities, European vanilla options on equity in the presence of stochastic volatility as well as zero-coupon bonds, guaranteed endowment options and average-rate claims under stochastic interest rates. We devote a great part of the present work to the square-root process and the geometric Brownian motion, two important subcases of the CEV process. For both these nested diffusions, a number of mathematical and financial quantities have been solved for in the literature in closed-form, in terms of Laplace transforms. In this thesis, we derive these quantities in a fully explicit form, which is advantageous both from a theoretical point of view, to gain insight in their mathematical structure and from a practical stand, as the numerical evaluation of our formulae appear more robust and efficient than other numerical methods for some ranges of parameters. In the general CEV case, for which the integrated process has scarcely been considered in the literature, we derive semi-closed form expressions

Essays in financial asset pricing

Three essays in financial asset pricing are given; one concerning the partial differential equation (PDE) pricing and hedging of a class of continuous/generalized power mean Asian options, via their (optimal) Lie point symmetry groups, leading to practical pricing formulas. The second presents high-frequency predictions of S&P 500 returns via several machine learning models, statistically significantly demonstrating short-horizon market predictability and economically significantly profitable (beyond transaction costs) trading strategies. The third compares profitability between these [(mean) ensemble] strategies and Asian option Δ-hedging, using results of the first. Interpreting bounds on arithmetic Asian option prices as ask and bid values, hedging profitability depends largely on securing prices closer to the bid, and settling midway between the bid and ask, significant profits are consistently accumulated during the years 2004-2016. Ensemble predictive trading the S&P 500 yields comparatively very small returns, despite trading much more frequently. The pricing and hedging of (arithmetic) Asian options are difficult and have spurred several solution approaches, differing in theoretical insight and practicality. Multiple families of exact solutions to relaxed power mean Asian option pricing boundary-value problems are explicitly established, which approximately satisfy the full pricing problem, and in one case, converge to exact solutions under certain parametric restrictions. Corresponding hedging parameters/ Greeks are derived. This family consists of (optimal) invariant solutions, constructed for the corresponding pricing PDEs. Numerical experiments explore this family behaviorally, achieving reliably accurate pricing. The second chapter studies intraday market return predictability. Regularized linear and nonlinear tree-based models enjoy significant predictability. Ensemble models perform best across time and their return predictability realizes economically significant profits with Sharpe ratios after transaction costs of 0.98. These results strongly evidence that intraday market returns are predictable during short time horizons, beyond that explainable by transaction costs. The lagged constituent returns are shown to hold significant predictive information not contained in lagged market returns or price trend and liquidity characteristics. Consistent with the hypothesis that predictability is driven by slow-moving trader capital, predictability decreased post-decimalization, and market returns are more predictable midday, on days with high volatility or illiquidity, and during financial crises

Fractional Calculus and the Future of Science

Newton foresaw the limitations of geometry’s description of planetary behavior and developed fluxions (differentials) as the new language for celestial mechanics and as the way to implement his laws of mechanics. Two hundred years later Mandelbrot introduced the notion of fractals into the scientific lexicon of geometry, dynamics, and statistics and in so doing suggested ways to see beyond the limitations of Newton’s laws. Mandelbrot’s mathematical essays suggest how fractals may lead to the understanding of turbulence, viscoelasticity, and ultimately to end of dominance of the Newton’s macroscopic world view.Fractional Calculus and the Future of Science examines the nexus of these two game-changing contributions to our scientific understanding of the world. It addresses how non-integer differential equations replace Newton’s laws to describe the many guises of complexity, most of which lay beyond Newton’s experience, and many had even eluded Mandelbrot’s powerful intuition. The book’s authors look behind the mathematics and examine what must be true about a phenomenon’s behavior to justify the replacement of an integer-order with a noninteger-order (fractional) derivative. This window into the future of specific science disciplines using the fractional calculus lens suggests how what is seen entails a difference in scientific thinking and understanding

An Initial Framework Assessing the Safety of Complex Systems

Trabajo presentado en la Conference on Complex Systems, celebrada online del 7 al 11 de diciembre de 2020.Atmospheric blocking events, that is large-scale nearly stationary atmospheric pressure patterns, are often associated with extreme weather in the mid-latitudes, such as heat waves and cold spells which have significant consequences on ecosystems, human health and economy. The high impact of blocking events has motivated numerous studies. However, there is not yet a comprehensive theory explaining their onset, maintenance and decay and their numerical prediction remains a challenge. In recent years, a number of studies have successfully employed complex network descriptions of fluid transport to characterize dynamical patterns in geophysical flows. The aim of the current work is to investigate the potential of so called Lagrangian flow networks for the detection and perhaps forecasting of atmospheric blocking events. The network is constructed by associating nodes to regions of the atmosphere and establishing links based on the flux of material between these nodes during a given time interval. One can then use effective tools and metrics developed in the context of graph theory to explore the atmospheric flow properties. In particular, Ser-Giacomi et al. [1] showed how optimal paths in a Lagrangian flow network highlight distinctive circulation patterns associated with atmospheric blocking events. We extend these results by studying the behavior of selected network measures (such as degree, entropy and harmonic closeness centrality)at the onset of and during blocking situations, demonstrating their ability to trace the spatio-temporal characteristics of these events.This research was conducted as part of the CAFE (Climate Advanced Forecasting of sub-seasonal Extremes) Innovative Training Network which has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement No. 813844

Computer Aided Verification

This open access two-volume set LNCS 10980 and 10981 constitutes the refereed proceedings of the 30th International Conference on Computer Aided Verification, CAV 2018, held in Oxford, UK, in July 2018. The 52 full and 13 tool papers presented together with 3 invited papers and 2 tutorials were carefully reviewed and selected from 215 submissions. The papers cover a wide range of topics and techniques, from algorithmic and logical foundations of verification to practical applications in distributed, networked, cyber-physical, and autonomous systems. They are organized in topical sections on model checking, program analysis using polyhedra, synthesis, learning, runtime verification, hybrid and timed systems, tools, probabilistic systems, static analysis, theory and security, SAT, SMT and decisions procedures, concurrency, and CPS, hardware, industrial applications

Tools and Algorithms for the Construction and Analysis of Systems

This open access two-volume set constitutes the proceedings of the 26th International Conference on Tools and Algorithms for the Construction and Analysis of Systems, TACAS 2020, which took place in Dublin, Ireland, in April 2020, and was held as Part of the European Joint Conferences on Theory and Practice of Software, ETAPS 2020. The total of 60 regular papers presented in these volumes was carefully reviewed and selected from 155 submissions. The papers are organized in topical sections as follows: Part I: Program verification; SAT and SMT; Timed and Dynamical Systems; Verifying Concurrent Systems; Probabilistic Systems; Model Checking and Reachability; and Timed and Probabilistic Systems. Part II: Bisimulation; Verification and Efficiency; Logic and Proof; Tools and Case Studies; Games and Automata; and SV-COMP 2020

Computer Aided Verification

This open access two-volume set LNCS 10980 and 10981 constitutes the refereed proceedings of the 30th International Conference on Computer Aided Verification, CAV 2018, held in Oxford, UK, in July 2018. The 52 full and 13 tool papers presented together with 3 invited papers and 2 tutorials were carefully reviewed and selected from 215 submissions. The papers cover a wide range of topics and techniques, from algorithmic and logical foundations of verification to practical applications in distributed, networked, cyber-physical, and autonomous systems. They are organized in topical sections on model checking, program analysis using polyhedra, synthesis, learning, runtime verification, hybrid and timed systems, tools, probabilistic systems, static analysis, theory and security, SAT, SMT and decisions procedures, concurrency, and CPS, hardware, industrial applications