B-spline techniques for volatility modeling

This paper is devoted to the application of B-splines to volatility modeling, specifically the calibration of the leverage function in stochastic local volatility models and the parameterization of an arbitrage-free implied volatility surface calibrated to sparse option data. We use an extension of classical B-splines obtained by including basis functions with infinite support. We first come back to the application of shape-constrained B-splines to the estimation of conditional expectations, not merely from a scatter plot but also from the given marginal distributions. An application is the Monte Carlo calibration of stochastic local volatility models by Markov projection. Then we present a new technique for the calibration of an implied volatility surface to sparse option data. We use a B-spline parameterization of the Radon-Nikodym derivative of the underlying's risk-neutral probability density with respect to a roughly calibrated base model. We show that this method provides smooth arbitrage-free implied volatility surfaces. Finally, we sketch a Galerkin method with B-spline finite elements to the solution of the partial differential equation satisfied by the Radon-Nikodym derivative.Comment: 25 page

A Unified Framework of Constrained Regression

Generalized additive models (GAMs) play an important role in modeling and understanding complex relationships in modern applied statistics. They allow for flexible, data-driven estimation of covariate effects. Yet researchers often have a priori knowledge of certain effects, which might be monotonic or periodic (cyclic) or should fulfill boundary conditions. We propose a unified framework to incorporate these constraints for both univariate and bivariate effect estimates and for varying coefficients. As the framework is based on component-wise boosting methods, variables can be selected intrinsically, and effects can be estimated for a wide range of different distributional assumptions. Bootstrap confidence intervals for the effect estimates are derived to assess the models. We present three case studies from environmental sciences to illustrate the proposed seamless modeling framework. All discussed constrained effect estimates are implemented in the comprehensive R package mboost for model-based boosting.Comment: This is a preliminary version of the manuscript. The final publication is available at http://link.springer.com/article/10.1007/s11222-014-9520-

Evaluating the Variability of Urban Land Surface Temperatures Using Drone Observations

Urbanization and climate change are driving increases in urban land surface temperatures that pose a threat to human and environmental health. To address this challenge, we must be able to observe land surface temperatures within spatially complex urban environments. However, many existing remote sensing studies are based upon satellite or aerial imagery that capture temperature at coarse resolutions that fail to capture the spatial complexities of urban land surfaces that can change at a sub-meter resolution. This study seeks to fill this gap by evaluating the spatial variability of land surface temperatures through drone thermal imagery captured at high-resolutions (13 cm). In this study, flights were conducted using a quadcopter drone and thermal camera at two case study locations in Milwaukee, Wisconsin and El Paso, Texas. Results indicate that land use types exhibit significant variability in their surface temperatures (3.9–15.8 °C) and that this variability is influenced by surface material properties, traffic, weather and urban geometry. Air temperature and solar radiation were statistically significant predictors of land surface temperature (R2 0.37–0.84) but the predictive power of the models was lower for land use types that were heavily impacted by pedestrian or vehicular traffic. The findings from this study ultimately elucidate factors that contribute to land surface temperature variability in the urban environment, which can be applied to develop better temperature mitigation practices to protect human and environmental health

Modeling association between DNA copy number and gene expression with constrained piecewise linear regression splines

DNA copy number and mRNA expression are widely used data types in cancer studies, which combined provide more insight than separately. Whereas in existing literature the form of the relationship between these two types of markers is fixed a priori, in this paper we model their association. We employ piecewise linear regression splines (PLRS), which combine good interpretation with sufficient flexibility to identify any plausible type of relationship. The specification of the model leads to estimation and model selection in a constrained, nonstandard setting. We provide methodology for testing the effect of DNA on mRNA and choosing the appropriate model. Furthermore, we present a novel approach to obtain reliable confidence bands for constrained PLRS, which incorporates model uncertainty. The procedures are applied to colorectal and breast cancer data. Common assumptions are found to be potentially misleading for biologically relevant genes. More flexible models may bring more insight in the interaction between the two markers.Comment: Published in at http://dx.doi.org/10.1214/12-AOAS605 the Annals of Applied Statistics (http://www.imstat.org/aoas/) by the Institute of Mathematical Statistics (http://www.imstat.org