191 research outputs found
Embedding laws in diffusions by functions of time
We present a constructive probabilistic proof of the fact that if
is standard Brownian motion started at , and is a
given probability measure on such that , then there
exists a unique left-continuous increasing function
and a unique left-continuous
decreasing function such
that stopped at or
has the law . The method of proof relies upon weak convergence arguments
arising from Helly's selection theorem and makes use of the L\'{e}vy metric
which appears to be novel in the context of embedding theorems. We show that
is minimal in the sense of Monroe so that the stopped process
satisfies natural uniform
integrability conditions expressed in terms of . We also show that
has the smallest truncated expectation among all stopping times
that embed into . The main results extend from standard Brownian
motion to all recurrent diffusion processes on the real line.Comment: Published at http://dx.doi.org/10.1214/14-AOP941 in the Annals of
Probability (http://www.imstat.org/aop/) by the Institute of Mathematical
Statistics (http://www.imstat.org
Global C¹ regularity of the value function in optimal stopping problems
We show that if either the process is strong Feller and the boundary point is probabilistically regular for the stopping set, or the process is strong Markov and the boundary point is probabilistically regular for the interior of the stopping set, then the boundary point is Green regular for the stopping set. Combining this implication with the existence of a continuously differentiable flow of the process we show that the value function is continuously differentiable at the optimal stopping boundary whenever the gain function is so. The derived fact holds both in the parabolic and elliptic case of the boundary value problem under the sole hypothesis of probabilistic regularity of the optimal stopping boundary, thus improving upon known analytic results in the PDE literature, and establishing the fact for the first time in the case of integro-differential equations. The method of proof is purely probabilistic and conceptually simple. Examples of application include the first known probabilistic proof of the fact that the time derivative of the value function in the American put problem is continuous across the optimal stopping boundary
Detecting Changes in Real-Time Data: A User's Guide to Optimal Detection
The real-time detection of changes in a noisily observed signal is an important problem in applied science and engineering. The study of parametric optimal detection theory began in the 1930s, motivated by applications in production and defence. Today this theory, which aims to minimize a given measure of detection delay under accuracy constraints, finds applications in domains including radar, sonar, seismic activity, global positioning, psychological testing, quality control, communications and power systems engineering. This paper reviews developments in optimal detection theory and sequential analysis, including sequential hypothesis testing and change-point detection, in both Bayesian and classical (non-Bayesian) settings. For clarity of exposition, we work in discrete time and provide a brief discussion of the continuous time setting, including recent developments using stochastic calculus. Different measures of detection delay are presented, together with the corresponding optimal solutions. We emphasize the important role of the signal-to-noise ratio and discuss both the underlying assumptions and some typical applications for each formulation.
This article is part of the themed issue ‘Energy management: flexibility, risk and optimization’.</jats:p
Optimal prediction of resistance and support levels
Assuming that the asset price X follows a geometric Brownian motion we study the optimal prediction problem in
Precautionary Measures for Credit Risk Management in Jump Models
Sustaining efficiency and stability by properly controlling the equity to
asset ratio is one of the most important and difficult challenges in bank
management. Due to unexpected and abrupt decline of asset values, a bank must
closely monitor its net worth as well as market conditions, and one of its
important concerns is when to raise more capital so as not to violate capital
adequacy requirements. In this paper, we model the tradeoff between avoiding
costs of delay and premature capital raising, and solve the corresponding
optimal stopping problem. In order to model defaults in a bank's loan/credit
business portfolios, we represent its net worth by Levy processes, and solve
explicitly for the double exponential jump diffusion process and for a general
spectrally negative Levy process.Comment: 31 pages, 4 figure
Optimization in task--completion networks
We discuss the collective behavior of a network of individuals that receive,
process and forward to each other tasks. Given costs they store those tasks in
buffers, choosing optimally the frequency at which to check and process the
buffer. The individual optimizing strategy of each node determines the
aggregate behavior of the network. We find that, under general assumptions, the
whole system exhibits coexistence of equilibria and hysteresis.Comment: 18 pages, 3 figures, submitted to JSTA
Solving the dual Russian option problem by using change-of-measure arguments
We apply the change-of-measure arguments of Shepp and Shiryaev [38]to study the dual Russian option pricing problem proposed by Shepp and Shiryaev [39] as an optimal stopping problem for a one-dimensional diffusion process with reflection. We recall the solution to the associated free-boundary problem and give a solution to the resulting onedimensional optimal stopping problem by using the martingale approach of Beibel and Lerche [6] and [7]
Local time and the pricing of time-dependent barrier options
A time-dependent double-barrier option is a derivative security that delivers
the terminal value at expiry if neither of the continuous
time-dependent barriers b_\pm:[0,T]\to \RR_+ have been hit during the time
interval . Using a probabilistic approach we obtain a decomposition of
the barrier option price into the corresponding European option price minus the
barrier premium for a wide class of payoff functions , barrier functions
and linear diffusions . We show that the barrier
premium can be expressed as a sum of integrals along the barriers of
the option's deltas \Delta_\pm:[0,T]\to\RR at the barriers and that the pair
of functions solves a system of Volterra integral
equations of the first kind. We find a semi-analytic solution for this system
in the case of constant double barriers and briefly discus a numerical
algorithm for the time-dependent case.Comment: 32 pages, to appear in Finance and Stochastic
Boundary-crossing identities for diffusions having the time-inversion property
We review and study a one-parameter family of functional transformations, denoted by (S (β)) β∈ℝ, which, in the case β<0, provides a path realization of bridges associated to the family of diffusion processes enjoying the time-inversion property. This family includes Brownian motions, Bessel processes with a positive dimension and their conservative h-transforms. By means of these transformations, we derive an explicit and simple expression which relates the law of the boundary-crossing times for these diffusions over a given function f to those over the image of f by the mapping S (β), for some fixed β∈ℝ. We give some new examples of boundary-crossing problems for the Brownian motion and the family of Bessel processes. We also provide, in the Brownian case, an interpretation of the results obtained by the standard method of images and establish connections between the exact asymptotics for large time of the densities corresponding to various curves of each family
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