Market price of risk specifications for affine models: Theory and evidence

We extend the standard specification of the market price of risk for affine yield models, and apply it to U.S. Treasury data. Our specification often provides better fit, sometimes with very high statistical significance. The improved fit comes from the time-series rather than cross-sectional features of the yield curve. We derive conditions under which our specification does not admit arbitrage opportunities. The extension has extremely strong statistical significance for affine yield models with multiple square-root type variables. Although we focus on affine yield models, our specification can be used with other asset pricing models as well

Multiple G-It\^{o} integral in the G-expectation space

In this paper, motivated by mathematic finance we introduce the multiple G-It\^{o} integral in the G-expectation space, then investigate how to calculate. We get the the relationship between Hermite polynomials and multiple G-It\^{o} integrals which is a natural extension of the classical result obtained by It\^{o} in 1951.Comment: 9 page

Yield Curve Shapes and the Asymptotic Short Rate Distribution in Affine One-Factor Models

We consider a model for interest rates, where the short rate is given by a time-homogenous, one-dimensional affine process in the sense of Duffie, Filipovic and Schachermayer. We show that in such a model yield curves can only be normal, inverse or humped (i.e. endowed with a single local maximum). Each case can be characterized by simple conditions on the present short rate. We give conditions under which the short rate process will converge to a limit distribution and describe the limit distribution in terms of its cumulant generating function. We apply our results to the Vasicek model, the CIR model, a CIR model with added jumps and a model of Ornstein-Uhlenbeck type

Representation of the penalty term of dynamic concave utilities

In this paper we will provide a representation of the penalty term of general dynamic concave utilities (hence of dynamic convex risk measures) by applying the theory of g-expectations.Comment: An updated version is published in Finance & Stochastics. The final publication is available at http://www.springerlink.co

An overview of Viscosity Solutions of Path-Dependent PDEs

This paper provides an overview of the recently developed notion of viscosity solutions of path-dependent partial di erential equations. We start by a quick review of the Crandall- Ishii notion of viscosity solutions, so as to motivate the relevance of our de nition in the path-dependent case. We focus on the wellposedness theory of such equations. In partic- ular, we provide a simple presentation of the current existence and uniqueness arguments in the semilinear case. We also review the stability property of this notion of solutions, in- cluding the adaptation of the Barles-Souganidis monotonic scheme approximation method. Our results rely crucially on the theory of optimal stopping under nonlinear expectation. In the dominated case, we provide a self-contained presentation of all required results. The fully nonlinear case is more involved and is addressed in [12]

Recent progress in random metric theory and its applications to conditional risk measures

The purpose of this paper is to give a selective survey on recent progress in random metric theory and its applications to conditional risk measures. This paper includes eight sections. Section 1 is a longer introduction, which gives a brief introduction to random metric theory, risk measures and conditional risk measures. Section 2 gives the central framework in random metric theory, topological structures, important examples, the notions of a random conjugate space and the Hahn-Banach theorems for random linear functionals. Section 3 gives several important representation theorems for random conjugate spaces. Section 4 gives characterizations for a complete random normed module to be random reflexive. Section 5 gives hyperplane separation theorems currently available in random locally convex modules. Section 6 gives the theory of random duality with respect to the locally $L^{0}-$convex topology and in particular a characterization for a locally $L^{0}-$convex module to be $L^{0}-$pre$-$barreled. Section 7 gives some basic results on $L^{0}-$convex analysis together with some applications to conditional risk measures. Finally, Section 8 is devoted to extensions of conditional convex risk measures, which shows that every representable $L^{\infty}-$type of conditional convex risk measure and every continuous $L^{p}-$type of convex conditional risk measure ($1\leq p<+\infty$) can be extended to an $L^{\infty}_{\cal F}({\cal E})-$type of $\sigma_{\epsilon,\lambda}(L^{\infty}_{\cal F}({\cal E}), L^{1}_{\cal F}({\cal E}))-$lower semicontinuous conditional convex risk measure and an $L^{p}_{\cal F}({\cal E})-$type of ${\cal T}_{\epsilon,\lambda}-$continuous conditional convex risk measure ($1\leq p<+\infty$), respectively.Comment: 37 page

Continuous Equilibrium in Affine and Information-Based Capital Asset Pricing Models

We consider a class of generalized capital asset pricing models in continuous time with a finite number of agents and tradable securities. The securities may not be sufficient to span all sources of uncertainty. If the agents have exponential utility functions and the individual endowments are spanned by the securities, an equilibrium exists and the agents' optimal trading strategies are constant. Affine processes, and the theory of information-based asset pricing are used to model the endogenous asset price dynamics and the terminal payoff. The derived semi-explicit pricing formulae are applied to numerically analyze the impact of the agents' risk aversion on the implied volatility of simultaneously-traded European-style options.Comment: 24 pages, 4 figure

On arbitrages arising from honest times

In the context of a general continuous financial market model, we study whether the additional information associated with an honest time gives rise to arbitrage profits. By relying on the theory of progressive enlargement of filtrations, we explicitly show that no kind of arbitrage profit can ever be realised strictly before an honest time, while classical arbitrage opportunities can be realised exactly at an honest time as well as after an honest time. Moreover, stronger arbitrages of the first kind can only be obtained by trading as soon as an honest time occurs. We carefully study the behavior of local martingale deflators and consider no-arbitrage-type conditions weaker than NFLVR.Comment: 25 pages, revised versio

Replication of Wiener-Transformable Stochastic Processes with Application to Financial Markets with Memory

Part of the Springer Proceedings in Mathematics & Statistics book series (PROMS, volume 271)Daphne Jackson fellowship funded by EPSRC; Australian Research Council (project number DP150102758); ToppForsk project nr. 274410 of the Research Council of Norway with title STORM: Stochastics for Time-Space Risk Models