Jump-Diffusion Risk-Sensitive Asset Management I: Diffusion Factor Model

This paper considers a portfolio optimization problem in which asset prices are represented by SDEs driven by Brownian motion and a Poisson random measure, with drifts that are functions of an auxiliary diffusion factor process. The criterion, following earlier work by Bielecki, Pliska, Nagai and others, is risk-sensitive optimization (equivalent to maximizing the expected growth rate subject to a constraint on variance.) By using a change of measure technique introduced by Kuroda and Nagai we show that the problem reduces to solving a certain stochastic control problem in the factor process, which has no jumps. The main result of the paper is to show that the risk-sensitive jump diffusion problem can be fully characterized in terms of a parabolic Hamilton-Jacobi-Bellman PDE rather than a PIDE, and that this PDE admits a classical C^{1,2} solution.Comment: 33 page

Contributions to risk-sensitive asset management

Imperial Users onl

Risk-sensitive investment in a finite-factor model

A new jump diffusion regime-switching model is introduced, which allows for linking jumps in asset prices with regime changes. We prove the existence and uniqueness of the solution to the risk-sensitive asset management criterion maximisation problem in this setting. We provide an ODE for the optimal value function, which may be efficiently solved numerically. Relevant probability measure changes are discussed in the appendix. The approach of Klebaner and Lipster (2014) is used to prove the martingale property of the relevant density processes.Comment: 23 pages, 1 figur

Presence of multiple bacterial markers in clinical samples might be useful for presumptive diagnosis of infection in cirrhotic patients with culture-negative reports

Bacterial infections in cirrhotic patients with ascites are associated with a severe prognosis and an increased risk of death. The microbiological standard tests for the diagnosis of suspected infection, based on culture test of blood and ascitic fluid, are, in many cases (30-40 %), negative, even when patients show symptoms of infection. A multiple culture-independent protocol was applied and evaluated as a diagnostic and prognostic tool for the detection of bacterial infection in cirrhotic patients. Sixty-four culture-negative samples obtained from 34 cirrhotic patients, with PMN < 250 cells/μl of ascitic fluid, were screened for the presence of bacterial DNA, endotoxin, peptidoglycan/β-glucan and microscopically visible bacterial cells. Correlations between the presence of multiple markers and various clinical and laboratory parameters were evaluated. Bacterial DNA was detected in 23 samples collected from 16 patients; a large part of these samples also showed the presence of other bacterial markers, which was associated with a worsening of liver functionality, a higher incidence of infections during the follow-up and a higher mortality rate in our cohort of cirrhotic patients. We believe that the detection of additional bacterial markers in bacterial DNA-positive clinical samples makes the bacterial presence and its clinical significance more realistic and might be useful as early markers of an ongoing bacterial infection and in establishing a clinical prognosis

The Swiss black swan bad scenario: is Switzerland another casualty of the Eurozone crisis

Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans are the worst type of bad scenario: unexpected and extreme. The Swiss National Bank decision on January 15, 2015 to abandon the 1.20 peg against the euro was a tremendous blow for many Swiss exporters, but also Swiss and international investors, hedge funds, global macro funds, banks as well as the Swiss central bank. In this paper we discuss the causes for this action, the money losers and the few winners, what it means for Switzerland, Europe and the rest of the world, what kinds of trades lost and how they have been prevented

Jump-diffusion asset-liability management via risk-sensitive control

In this paper, we use risk-sensitive control methods to solve a jump-diffusion asset–liability management (ALM) problem. We show that the ALM problem admits a unique classical ( C1,2C1,2 ) solution under two different sets of assumptions

Some historical perspectives on the Bond-Stock Earnings Yield Model for crash prediction around the world

We provide a historical perspective focusing on Ziemba's experiences and research on the bond-stock earnings yield differential model (BSEYD) starting from when he first used it in Japan in 1988 through to the present in 2014. The model has called many but not all crashes. Those called have high interest rates in long term bonds relative to the trailing earnings to price ratio. In general, when the model is in the danger zone, almost always there will be a crash. The model predicted the crashes in China, Iceland and the US in the 2006-9 period. Iceland had a drop of fully 95%. For the US the call was on June 14, 2007 and the stock market fell 56.8%. A longer term study for the US, Canada, Japan, Germany, and UK shows that over long periods being in the stock market when the bond-stock signal is not in the danger zone and in cash when it is in the danger zone provides a final wealth about double buy and hold for each of these five countries. The best use of the model is for predicting crashes. Finally we compare Shiller's high PE ratio crash model to the BSEYD model for the US market from 1962-2012. While both models add value, the BSEYD model predicts crashes better