2015 Informs Annual Meeting

TD06

INFORMS Philadelphia – 2015

TD06 06-Room 306, Marriott Quantitative Finance and Risk Management Sponsor: Financial Services Sponsored Session Chair: Ning Cai, Associate Professor, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China, ningcai@ust.hk 1 - Pricing Asian Options under Markov Processes Ning Cai, Associate Professor, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China, ningcai@ust.hk We derive analytical approximations to both continuous and discrete Asian option prices under general Markov processes. Numerical results illustrate that our pricing methods are accurate and fast under diffusion models, jump diffusion models, and pure jump models. United States of America, ads2@berkeley.edu, Kay Giesecke Reduced-form models of name-by-name default timing are widely used to measure portfolio credit risk. Combinatorial aspects of many default timing problems render them NP-complete. Nevertheless, well designed transform methods do yield efficient algorithms. We illustrate such an algorithm on an application of CDO pricing. The proposed method reduces computational complexity by orders of magnitude over those encountered in the literature. A complete error analysis is provided. 3 - Closed-Form Valuation of Barrier Options Haohong Lin, Department of Industrial Engineering and Logistics Management, HKUST, Hong Kong, Hong Kong - PRC, hlinaa@ust.hk, Ning Cai We study the pricing problem of barrier options that are among the most popular exotic options in the financial market and derive closed-form pricing formulas under some option pricing models. Numerical results suggest that our pricing method is accurate and efficient. 4 - Does the Prohibition of Trade-throughs Hurt Liquidity Demanders? Ningyuan Chen, Columbia University, S. W. Mudd 321, 500 W 120th Street, New York, NY, 10027, United States of America, nc2462@columbia.edu, Steven Kou We study the impact of prohibiting trade-throughs on liquidity demanders. We find that after trade-throughs are prohibited, the transactions of a liquidity demander might have higher execution cost and effective spread. However, the additional cost is insignificant for small trades and stocks with abundant liquidity provision. Our results favor the enforcement of the Order Protection Rule, as the cost it incurs on liquidity demanders may be outweighed by its benefit. TD07 07-Room 307, Marriott Topics in Optimal Investment Cluster: Risk Management Invited Session Chair: Mykhaylo Shkolnikov, Princeton University, ORFE, Princeton, NJ, 08540, United States of America, mshkolni@gmail.com 1 - Arbitrage-free Valuation and Hedging of XVA Maxim Bichuch, Johns Hopkins University, Baltimore, MD, United States of America, mbichuch@jhu.edu, Agostino Capponi, Stephan Sturm We introduce a framework for computing the Total Valuation Adjustment (XVA) of an European claim accounting for funding costs, counterparty risk, and collateral mitigation. We derive the nonlinear BSDEs associated with the replicating portfolios of long and short positions, and define the buyer and seller’s XVAs. When borrowing and lending rates coincide we provide a fully explicit expression for the XVA. When they differ, we derive the semi-linear PDEs, and conduct a numerical analysis. 2 - Rationalizing Behavioral Portfolio Choice Stephan Sturm, Worcester Polytechnic Institute, Worcester, MA, United States of America, ssturm@wpi.edu, Carole Bernard Classical portfolio optimization theory postulates that investors’ preferences are rational and the optimization criterion is expected utility, for some increasing and concave utility function. This contrasts with with empirical finding of cognitive psychology. In this talk we try to answer the question if a given behavioral portfolio choice in a general incomplete semimartingale market can be replicated 2 - Transform Methods for Default Timing Problems Alex Shkolnik, University of California, Berkeley, CA,

in the rational expected utility framework. 3 - Sequential Monte Carlo with Parameter Learning for Long-memory Processes

Konstantinos Spiliopoulos, Assistant Professor, Boston University, Department of Mathematics and Statistics, 111 Cummington Mall, Boston, MA, 02215, United States of America, kspiliop@math.bu.edu We consider state-space models specified up to an unknown vector of parameters and in which the unobserved state process exhibits long-memory. We estimate both the state process and the parameter vector and propose a sequential Monte Carlo method that is based on smoothing of the sample points of model parameters. We establish a central limit theorem for the state and parameter filter. We apply the approach to S&P 500 data in the context of a stochastic volatility model with long memory. 4 - Leveraged ETF Portfolios with Delta-vega Control Zheng Wang, Columbia University, 116th Street, New York, NY, 10027, United States of America, zw2192@columbia.edu, Tim Leung We analyze a collection of static portfolio strategies that allow an investor to control portfolio sensitivity with respect to the short-term return and realized volatility of a reference asset. This is done by choosing appropriate weights of each constituent in a portfolio of leveraged ETFs. We backtest our proposed strategies using empirical data of major equity leveraged ETFs and illustrate the efficacy of our methodology. TD08 08-Room 308, Marriott Tutorial in Financial Services Sponsor: Financial Services Sponsored Session Chair: Bo Zhang, IBM Research, 1101 Kitchawan Road, Route 134, Yorktown Heights, NY, 10594, United States of America, zhangbo@us.ibm.com 1 - Reduced Form and Structural Models in Energy Finance Stathis Tompaidis, Professor, University of Texas at Austin, Office of Financial Research, Austin, TX, 78712, United States of America, Stathis.Tompaidis@mccombs.utexas.edu We present both reduced form and structural models used in Energy Finance. The models span the oil, gasoline, refinery, natural gas, and electricity markets, and can be used to value generators, oil and natural gas fields, and electricity generators. TD09 09-Room 309, Marriott Collaborative R&D Sponsor: Technology, Innovation Management & Entrepreneurship Sponsored Session Chair: Niyazi Taneri, SUTD, 8 Somapah Rd, Singapore, Singapore, niyazitaneri@sutd.edu.sg 1 - Incentivizing External Experts in New Product Development Shantanu Bhattacharya, Singapore Management University, Lee Kong Chain School of Business, Grange Heights, Singapore, 238145, Singapore, shantanub@smu.edu.sg, Sameer Hasija We create a model of new product development where information on external factors like market potential and technology feasibility is sought from external experts. The firm has to adequately incentivize these experts to truthfully reveal their judgment. Contracts are presented to alleviate the resulting adverse selection problem. 2 - Supplier Incentives in Collaborative Product Development with Internal Competition Timofey Shalpegin, Lecturer, University of Auckland, 12 Grafton Road, Auckland, 1010, New Zealand, t.shalpegin@auckland.ac.nz Internal competition in new product development has a profound, yet unexplored effect on the incentives of the suppliers involved in a development project through collaboration with the manufacturer’s competing development teams. We study the optimal assignment of development teams to different suppliers. We find that due to the effect of competition on supplier incentives, the manufacturer may find it optimal to allocate more development teams to a supplier with lower capabilities.

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