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Trading to Stops
The use of trading stops is a common practice in financial markets for a variety of reasons: it reduces the frequency of trading and thereby transaction costs; it provides a simple way to control losses on a given trade, while also ensuring that profit-taking is not deferred indefinitely; and it allows opportunities to consider reallocating resources to other investments. In this paper, we try to explain why the use of stops may be desirable, by proposing a simple objective to be optimized. We investigate a number of commonly used rules for the placing and use of stops, either fixed or moving, with fixed costs, showing how to identify optimal levels at which to set stops, and compare the performance of different rules and strategies.This is the final published version of the paper. First Published in Siam Journal on Financial Mathematics in 2014, published by the Society of Industrial and Applied Mathematics (SIAM). Copyright © by SIAM. Unauthorized reproduction of this article is prohibited
Optimal Reinsurance to Minimize the Probability of Drawdown under the Mean-Variance Premium Principle: Asymptotic Analysis
In this paper, we consider an optimal reinsurance problem to minimize the probability of drawdown
for the scaled Cram´er-Lundberg risk model when the reinsurance premium is computed
according to the mean-variance premium principle. We extend the work of Liang et al. [16] to
the case of minimizing the probability of drawdown. By using the comparison method and the
tool of adjustment coefficients, we show that the minimum probability of drawdown for the scaled
classical risk model converges to the minimum probability for its diffusion approximation, and the
rate of convergence is of order O(n−1/2). We further show that using the optimal strategy from
the diffusion approximation in the scaled classical risk model is O(n−1/2)-optimalEste documento es una versión del artículo publicado en SIAM Journal on Financial Mathematics, 14(1), 279–313Universidad Torcuato Di TellaHebei University of TechnologyDepartment of Mathematics, University of Michiga
Weak Markovian Approximations of Rough Heston
The rough Heston model is a very popular recent model in mathematical
finance; however, the lack of Markov and semimartingale properties poses
significant challenges in both theory and practice. A way to resolve this
problem is to use Markovian approximations of the model. Several previous works
have shown that these approximations can be very accurate even when the number
of additional factors is very low. Existing error analysis is largely based on
the strong error, corresponding to the distance between the kernels.
Extending earlier results by [Abi Jaber and El Euch, SIAM Journal on Financial
Mathematics 10(2):309--349, 2019], we show that the weak error of the Markovian
approximations can be bounded using the -error in the kernel approximation
for general classes of payoff functions for European style options. Moreover,
we give specific Markovian approximations which converge super-polynomially in
the number of dimensions, and illustrate their numerical superiority in option
pricing compared to previously existing approximations. The new approximations
also work for the hyper-rough case
Horizon-unbiased Investment with Ambiguity
In the presence of ambiguity on the driving force of market randomness, we
consider the dynamic portfolio choice without any predetermined investment
horizon. The investment criteria is formulated as a robust forward performance
process, reflecting an investor's dynamic preference. We show that the market
risk premium and the utility risk premium jointly determine the investors'
trading direction and the worst-case scenarios of the risky asset's mean return
and volatility. The closed-form formulas for the optimal investment strategies
are given in the special settings of the CRRA preference
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