Pathwise functional calculus and applications to continuous-time finance

This thesis develops a mathematical framework for the analysis of continuous- time trading strategies which, in contrast to the classical setting of continuous-time finance, does not rely on stochastic integrals or other probabilistic notions. Using the recently developed `non-anticipative functional calculus', we first develop a pathwise definition of the gain process for a large class of continuous-time trading strategies which include the important class of delta-hedging strategies, as well as a pathwise definition of the self-financing condition. Using these concepts, we propose a framework for analyzing the performance and robustness of delta-hedging strategies for path-dependent derivatives across a given set of scenarios. Our setting allows for general path-dependent payoffs and does not require any probabilistic assumption on the dynamics of the underlying asset, thereby extending previous results on robustness of hedging strategies in the setting of diffusion models. We obtain a pathwise formula for the hedging error for a general path-dependent derivative and provide sufficient conditions ensuring the robustness of the delta hedge. We show in particular that robust hedges may be obtained in a large class of continuous exponential martingale models under a vertical convexity condition on the payoffs functional. Under the same conditions, we show that discontinuities in the underlying asset always deteriorate the hedging performance. These results are applied to the case of Asian options and barrier options. The last chapter, independent of the rest of the thesis, proposes a novel method, jointly developed with Andrea Pascucci and Stefano Pagliarani, for analytical approximations in local volatility models with L\ue9vy jumps. The main result is an expansion of the characteristic function in a local L\ue9vy model, which is worked out in the Fourier space by considering the adjoint formulation of the pricing problem. Combined with standard Fourier methods, our result provides effcient and accurate pricing formulae. In the case of Gaussian jumps, we also derive an explicit approximation of the transition density of the underlying process by a heat kernel expansion; the approximation is obtained in two ways: using PIDE techniques and working in the Fourier space. Numerical tests confirm the effectiveness of the method

Numerical Solution of Optimal Control Problems with Explicit and Implicit Switches

This dissertation deals with the efficient numerical solution of switched optimal control problems whose dynamics may coincidentally be affected by both explicit and implicit switches. A framework is being developed for this purpose, in which both problem classes are uniformly converted into a mixed–integer optimal control problem with combinatorial constraints. Recent research results relate this problem class to a continuous optimal control problem with vanishing constraints, which in turn represents a considerable subclass of an optimal control problem with equilibrium constraints. In this thesis, this connection forms the foundation for a numerical treatment. We employ numerical algorithms that are based on a direct collocation approach and require, in particular, a highly accurate determination of the switching structure of the original problem. Due to the fact that the switching structure is a priori unknown in general, our approach aims to identify it successively. During this process, a sequence of nonlinear programs, which are derived by applying discretization schemes to optimal control problems, is solved approximatively. After each iteration, the discretization grid is updated according to the currently estimated switching structure. Besides a precise determination of the switching structure, it is of central importance to estimate the global error that occurs when optimal control problems are solved numerically. Again, we focus on certain direct collocation discretization schemes and analyze error contributions of individual discretization intervals. For this purpose, we exploit a relationship between discrete adjoints and the Lagrange multipliers associated with those nonlinear programs that arise from the collocation transcription process. This relationship can be derived with the help of a functional analytic framework and by interrelating collocation methods and Petrov–Galerkin finite element methods. In analogy to the dual-weighted residual methodology for Galerkin methods, which is well–known in the partial differential equation community, we then derive goal–oriented global error estimators. Based on those error estimators, we present mesh refinement strategies that allow for an equilibration and an efficient reduction of the global error. In doing so we note that the grid adaption processes with respect to both switching structure detection and global error reduction get along with each other. This allows us to distill an iterative solution framework. Usually, individual state and control components have the same polynomial degree if they originate from a collocation discretization scheme. Due to the special role which some control components have in the proposed solution framework it is desirable to allow varying polynomial degrees. This results in implementation problems, which can be solved by means of clever structure exploitation techniques and a suitable permutation of variables and equations. The resulting algorithm was developed in parallel to this work and implemented in a software package. The presented methods are implemented and evaluated on the basis of several benchmark problems. Furthermore, their applicability and efficiency is demonstrated. With regard to a future embedding of the described methods in an online optimal control context and the associated real-time requirements, an extension of the well–known multi–level iteration schemes is proposed. This approach is based on the trapezoidal rule and, compared to a full evaluation of the involved Jacobians, it significantly reduces the computational costs in case of sparse data matrices

Stochastic Differential Equations with Jumps

Part I Stochastic Processes with Jumps Chapters: Probability Spaces, Semigroup Theory - Part II Stochastic Differential Equations with Jumps Chapters: Stochastic Calculus, Stochastic Differential Equations - Part III Reflected SDE with Jumps Chapters: Stochastic Differential Equations II, Stochastic Differential Equations III. Comment: This is last version from 2014-01-07. *This Initial version 15/May/2008 was corrected and augmented to produce the others 5 volumes

Optimal Sensing and Actuation Policies for Networked Mobile Agents in a Class of Cyber-Physical Systems

The main purpose of this dissertation is to define and solve problems on optimal sensing and actuating policies in Cyber-Physical Systems (CPSs). Cyber-physical system is a term that was introduced recently to define the increasing complexity of the interactions between computational hardwares and their physical environments. The problem of designing the ``cyber\u27\u27 part may not be trivial but can be solved from scratch. However, the ``physical\u27\u27 part, usually a natural physical process, is inherently given and has to be identified in order to propose an appropriate ``cyber\u27\u27 part to be adopted. Therefore, one of the first steps in designing a CPS is to identify its ``physical\u27\u27 part. The ``physical\u27\u27 part can belong to a large array of system classes. Among the possible candidates, we focus our interest on Distributed Parameter Systems (DPSs) whose dynamics can be modeled by Partial Differential Equations (PDE). DPSs are by nature very challenging to observe as their states are distributed throughout the spatial domain of interest. Therefore, systematic approaches have to be developed to obtain the optimal locations of sensors to optimally estimate the parameters of a given DPS. In this dissertation, we first review the recent methods from the literature as the foundations of our contributions. Then, we define new research problems within the above optimal parameter estimation framework. Two different yet important problems considered are the optimal mobile sensor trajectory planning and the accuracy effects and allocation of heterogeneous sensors. Under the remote sensing setting, we are able to determine the optimal trajectories of remote sensors. The problem of optimal robust estimation is then introduced and solved using an interlaced ``online\u27\u27 or ``real-time\u27\u27 scheme. Actuation policies are introduced into the framework to improve the estimation by providing the best stimulation of the DPS for optimal parameter identification, where trajectories of both sensors and actuators are optimized simultaneously. We also introduce a new methodology to solving fractional-order optimal control problems, with which we demonstrate that we can solve optimal sensing policy problems when sensors move in complex media, displaying fractional dynamics. We consider and solve the problem of optimal scale reconciliation using satellite imagery, ground measurements, and Unmanned Aerial Vehicles (UAV)-based personal remote sensing. Finally, to provide the reader with all the necessary background, the appendices contain important concepts and theorems from the literature as well as the Matlab codes used to numerically solve some of the described problems

SDEs, Jumps and Estimates

Long Title: Stochastic Ordinary Differential Equations with Jumps: Theory and Estimates. Chapters: Stochastic Integrals - Initial Approach to SDEs - Estimates of SDEs - Other Formulations of SDEs - SDEs with Reflection - PDE Connections